Investors will face an uncertain financial environment after the Reserve Bank cut its official cash rate to 2% yesterday and indicated further cuts will be needed.
As interest rates fall, some deposit rates may also be cut, leading to reduced income for savers with money in bank accounts.
Forsyth Barr broker Damian Foster said the Reserve Bank was under pressure to cut after both the Reserve Bank of Australia and the Bank of England cut their rates last week.
The New Zealand central bank was already an outlier with its 2.25% OCR as the ‘‘pack’’ moved further away.
The market expected a cut and some expected the Reserve Bank to go as low as 1.75%.
"While this did not occur, the governor [Graeme Wheeler] informed the market lowering the dollar is a priority and further cuts will be delivered if needed."
In the past, the Reserve Bank had been reluctant to cut the OCR and had not always received the appropriate response from the market as shown by the dollar heading higher in early trade yesterday, Mr Foster said.
Forsyth Barr was expecting to see companies issue more bonds on the back of lower yields and stable credit spreads.
Asked about how investors would fair in a low interest rate environment, Mr Foster said there could be some upside.
The major banks were unlikely to pass on the full 0.25% cut in the OCR.
"Ironically, the Reserve Bank will be quite pleased about this. They would view bank action — or inaction — in combination with the new loan-to-value restrictions, as taking some heat out of the residential property market."
Deposit rates might also be unaffected as banks were faced with asset growth outstripping deposit growth.
The deposit market was looking "pretty competitive", he said.
Last week, several Australian banks increased their one, two and three-year deposit rates despite the RBA cutting its cash rate to a record low of 1.5%.
With the market and electricity stocks performing in the past month, gross dividend yields had continued to track downwards.
The median yield was now below 7.5% and the average sector yield was below 8%, both for the first time in more than a year.
Relative to the property sector and other high-yielding stocks, the electricity sector had closed the gap but investors were still receiving about a 10% premium versus other quality yielding stocks and a 15% premium versus the property sector.
The gap between electricity sector yields and bond yield had remained constant at about 5.5%.
"While we believe the electricity sector still looks attractive on a yield basis, the overall yield appears fair to us relative to the risk," Mr Foster said.
HSBC Australia and New Zealand chief economist Paul Bloxham said the Reserve Bank’s discomfort with the level of the dollar was clear.
The short policy assessment at the front of the official statement said bluntly, "A decline in the exchange rate is needed."
The statement also included a forecast in which the trade-weighted index stayed at the current level and, to offset the dampening impact on inflation, the cash rate was projected to be cut to below 1%.
"While this is just a modelling exercise, it highlights the extent to which the Reserve Bank believes it is at the mercy of international developments beyond its control."
On the domestic front, the growth picture remained positive and the Reserve Bank’s gross domestic product (economic growth) forecasts had been lifted, Mr Bloxham said.
Annual growth was forecast at 3.4% in the year to March 2017, up from 3.2% previously, and 3.4% in the year to March 2018, from 3%.
Higher growth was expected to reduce spare capacity in the economy and along with the expected slowdown in inwards net migration, to lead to a tightening in the labour market, he said.
