Finally! Yes finally, relief is around the corner for borrowers as the Reserve Bank of New Zealand (RBNZ) starts cutting interest rates, which have been crippling the economy for the past two years.
But hold on. If you’re a saver, this is bad news, because we all know it won’t take long for the local Banks to start slashing their Term Deposit (TD) rates in response. Interest rate cuts, and potentially a lot of them, are usually bad news for savers, particularly if you are relying on income from your TD. But for other low risk assets, falling interest rates might be the opposite. Let’s dig into the detail.
First, let’s talk about why TD rates are heading south. When the RBNZ decides to cut the Official Cash Rate (OCR), Banks respond by lowering the rates they offer on their products - TD’s included. This is particularly tough for those relying on interest income, like retirees, who might find their earnings shrinking with every drop in the OCR. In their August Monetary Policy Statement (MPS) the RBNZ showed the OCR falling from 5.5% to 3% over the next two years and those cuts might have to be front-loaded. So, what’s a savvy saver to do in this low-rate landscape?
Enter bonds and infrastructure investments—the potential superheroes of your portfolio.
Bonds, especially those issued by the government or solid companies, could be your next best friend. When interest rates fall, bond prices usually rise, which means your investment could appreciate in value. Plus, bonds offer regular interest payments, known as coupons, which could deliver a more dependable income stream than a TD stuck in low-gear. Imagine receiving a steady income without the stress of watching your savings yield less and less.
But if you’re looking for something a bit more grounded, infrastructure investments might be your ticket. Picture this: investing in the roads, bridges, and utilities that keep New Zealand ticking. Infrastructure assets usually generate stable, long-term cash flows and tend to be less affected by the ups and downs of the economy. Plus, many of these investments are linked to contracts that adjust for inflation, offering some protection against rising prices. With the government and private sector likely to keep pumping money into infrastructure to spur growth, these investments could be a solid bet. Noting property and infrastructure investments are subject to more volatility compared to TD’s.
In short, while TD rates are expected to dip over the next year, don’t let that rain on your financial parade. Bonds and infrastructure investments offer exciting alternatives that could keep your money working hard, even when interest rates are playing it cool.
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