Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Labor’s budget ‘gift’ to retirees might be higher interest rates
The 2024-25 federal budget had re-election in 2025 written all over it as the Federal Treasurer Jim Chalmers handed out the goodies on Tuesday night – and retirees under enormous cost-of-living pressures will gratefully accept his handouts.
Freezing both the deeming rate for another 12 months and the cost of medicines on the Pharmaceutical Benefits Scheme (PBS) will be welcomed by retirees, especially as they will benefit most from the latter measure with the decision to extend it to 2030 for pensioners and concession cardholders who absorb nearly two-thirds of these payments.
The other windfall will come via the Government’s decision to give all households a one-off $300 energy rebate (the previous rebate only went to low-income households), a move Chalmers hopes will impress the Reserve Bank by claiming it will clip half a percentage point off the inflation rate.
But it was the decision to freeze the deeming rate that will probably be most warmly received in some retiree households with the lower deeming rate remaining at 0.25 per cent and at 2.25 per cent at the upper level until 30 June 2025. The freeze began in July 2022 with this latest decision extending it, in total, for three years.
In the run-up to the budget, there had been mounting concern in retiree circles that the rate would be unfrozen and brough closer to the cash rate of 4.35 per cent. In its pre-budget submission, National Seniors Australia argued that lifting the freeze on the deeming rate would mean hundreds of thousands of pensioners would have their pensions cut, some of those now eligible for a Commonwealth Seniors Health Card would lose this benefit and aged care costs would increase for anyone subject to means testing.
It concluded that freezing the rate for 12 months and reviewing the deeming methodology would give affected retirees time to plan for any change – and the Government obviously concurred. With Treasury estimating that those affected is approaching 900,000, it’s not difficult to understand why.
A budget delivering this amount of largesse in difficult economic times will have many practitioners of the dismal science – economics – in a lather. That will not upset the Government – former Labor Treasurer Paul Keating’s dictum that ‘good policy was good politics’ has long gone out the window – that has a looming election and a disgruntled electorate to pacify, including retirees. If that requires a bit of old-fashioned pork barrelling, then so be it.
What will worry the Government is how the Reserve Bank views the budget. Governor Michele Bullock has already put Labor on notice that interest rates could rise if the bank believes the budget will fuel inflation, and that will certainly put a cat among the election pigeons.
But for retirees, especially of the self-funded variety (many of which have self-managed super funds), a Reserve Bank that decides the budget is inflationary and tightens monetary policy could prove an unexpected bonus.
When interest rates rise, everyone’s attention – especially in the media – focuses on what it means to homeowners with mortgages. Although that’s understandable, what’s often forgotten is how higher interest rates benefit a retiree community that holds a fair percentage of its assets in cash or terms deposits. [SMSFs held $146 billion in cash and terms deposits, 17 per cent of total net SMSF assets of $878 billion, at December 2023.]
When interest rates were plummeting in response to the COVID crisis, reaching 0.1 per cent in November 2020, few spared a thought for self-funded retirees who were seeing their income dwindle before their very eyes, especially considering the market volatility at that time was hardly conducive to those for whom capital preservation is front and centre of their investment strategy.
Today, many financial institutions are offering better than five per cent on term deposits, and this can only increase if the Reserve Bank lifts interest rates. It will make this asset class even more attractive as well as being secure as – dare we say it – money in the bank. It could just be that higher interest rates could be Labor’s best budget handout to retirees.
