Low interest rates, which should stay in place for another 12 months or so, create a dilemma for investors and have encouraged them to look at riskier investments, particularly share markets.
The Reserve Bank of New Zealand announced yesterday morning that it was leaving the Official Cash rate (OCR) at 2.5% but it may cut the OCR “should the exchange rate remain strong without anything else changing”.
The United States Federal Reserve Board announced overnight that it had decided “to keep the target range for the federal funds rate at 0% to 0.25% and currently anticipates that economic conditions – including low rates of resource utilization and subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014”.
Current official Central Bank interest rates are as follows;
| Reserve Bank of New Zealand | 2.50% |
| Reserve Bank of Australia | 4.25% |
| US Federal Reserve Board | 0-0.25% |
| Bank of Japan | 0-0.1% |
| Bank of England | 0.50% |
| European Central Bank | 1.0% |
The Reserve Bank of Australia is expected to cut by 0.25% to 4.0% next week.
These low interest rates create a problem for retirees, particularly those who are dependent on interest income. It forces them to look at riskier assets in order to generate higher returns.
The New Zealand and Australian share markets look particularly attractive in this regard as the NZX has a 4.8% dividend yield and the ASX 4.7%.
As long as economic activity doesn’t contract sharply then the NZX and ASX offer good opportunities for income oriented investors in a low interest rate environment.
Brian Gaynor