Cash returns – what the ‘new normal’ looks like

The Reserve Bank of Australia (RBA) recently cut its official cash rate to a record low of 0.10%, from 0.25%. Combined with other measures aimed at boosting the economy, the near-zero rate has dramatically changed expectations for cash returns.

Returns from cash are now expected to move lower and could likely become slightly negative on an after-fee basis, in the order of -0.10% a year, in current conditions. Negative returns on cash may not match expectations, but these “new normal” conditions could be with us for a while, given the RBA’s commitment to maintaining its low cash rate for at least three years.¹ Australia is catching up with other developed nations, with Japan and much of Europe having experienced near-zero and negative central bank cash rates for a number of years.

Data source: Reserve Bank of Australia. Cash Rate Target data. Accessed 5/11/20.

The role of cash

Despite these return expectations, cash can remain a valuable asset class that meets members’ needs. Cash is often used in combination with other investments to provide liquidity, reduce risk, and provide diversification. In this regard, the role of cash has not changed.

A change in market conditions, as with the RBA’s recent announcement, can be a good prompt for reviewing your investment strategy. The investment option or options that were right for you a decade ago might not be now. Questions you might consider:

• Is your outlook short-term or long-term?
• Will you need cash soon for income or a large purchase?
• Do the risk levels of your investment option(s) match your risk tolerance?

Because cash is the most robust asset class against short-term market volatility, many consider it “not risky”. But if you have a long-term investment horizon, consider whether the current low returns on this asset class will meet your investment return objectives.

On the QSuper website, each investment option has an indicative investment horizon that can help members with their strategy. The Balanced option, for example, is recommended for an investment horizon of greater than five years, and the Cash option for an investment horizon of less than one year.

Term deposits

One alternative to cash is a term deposit, a fixed-term investment usually with a short time to maturity – a few months to a few years. Members looking at term deposits should consider the minimum deposit amount required and note that withdrawing funds before maturity also incurs a cost. QSuper members have access to term deposits through Self Invest.

Rates change weekly, but the examples below, sourced from the term deposits available via Self Invest, give members an idea of current term deposit rates.

Effective from Thursday 05 November 2020 to Thursday 12 November 2020.

Need some advice?

Professional guidance can help you to make informed, confident decisions and achieve your goals. QSuper members can access advice about their super at no additional cost. You can find out more about financial advice options at qsuper.qld.gov.au/advice or by calling us on 1300 360 750. This advice includes a review of your QSuper account investment strategy.

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1. Source: ‘Today’s Monetary Policy Decision’ speech by Philip Lowe, Governor RBA. Accessed 5/11/20.