Is rising inflation going to lead to higher interest rates soon?

Inflation has risen significantly in the US over the past year leading to some increase in market-determined interest rates and numerous predictions that the US Federal Reserve (Fed) will increase interest rates sooner than previously expected, with flow through to other countries such as Australia. The bond market and some economists believe that the Reserve Bank of Australia (RBA) will raise interest rates in 2022, which is much earlier than the RBA’s regular statements have indicated is likely.

My view is that Australian interest rates are unlikely to rise for at least another year and, if they do rise sooner, the rise will be small: 0.25% – 0.50%. This is despite the increase in Australian inflation over the last 6 months, driven by things like housing costs and petrol. However, exceptionally low fixed-rate mortgages are likely ending, even if official interest rates don’t rise, as bank funding costs are increasing moderately.

The RBA has consistently made it clear that wage growth is now central to policy and that it will not raise interest rates until actual inflation is sustainably within its 2-3% target range. That would require materially higher wage growth than current very low levels. Returning to high levels of immigration in 2022, as advocated by the Morrison Government, Treasury, the NSW Government, and business, would significantly increase the supply of labour. This would reduce worker bargaining power, keep unemployment somewhat elevated, and make any significant growth in wages unlikely.

Importantly, RBA Governor Phillip Lowe, has repeatedly argued for higher wage inflation. He has also acknowledged that high immigration pre-COVID effectively held down wages. With COVID reopening underway, it is likely that immigration with revert to previously high numbers and keep wage growth suppressed. I agree with Lowe that wages growth is desirable, but there is little evidence that this is happening despite employers claiming we have significant labour shortages.

There are also clear signs that the Chinese, German & French economies are slowing so while the US Fed may raise rates in 2022, rates are unlikely to rise in most countries and there is no obvious reason for the RBA to tighten simply because the US Fed raises rates.

Will you ever receive a Government (Centrelink) Age Pension?

Unlike many other countries, there is no automatic entitlement for Australians to receive a government pension when they reach the qualifying age, which will soon be age 67 for both men and women (it is 67 for anyone born after 1st January 1957). Eligibility to receive a part of full age pension is not automatic; it is dependent upon both your assets and income, which are combined for a couple. Assessable assets – what Centrelink considers in determining eligibility – do not include the principal (family) home, irrespective of value, but an individual or couple can only have one exempt home at any one time.

By design, the more super you accumulate by retirement age, the less age pension you are entitled to. A couple will have their age pension reduced when their assessable assets exceed $405,000. They become ineligible for any age pension once their combined assets exceed the current limit of $891,500. If they have a combined $1 million in super pensions and earn $50,000 (5%) tax-free, they may cost the government about $4,500 in forfeited income tax but they save the government $37,923 in age pension (the current maximum) that they cannot claim.

Many retirees who are ineligible for an Age Pension when they retire because their assets are above the cut-off for eligibility, will end up receiving at least a part Government age pension later in life when their assessable assets fall below the then prevailing cut-off. The future eligibility for at least a part age pension helps many retirees to effectively spend more in retirement without running out of funds prematurely.

The Commonwealth Seniors Health Card (CSHC)

Self-funded retirees of age pension age may be eligible for the Commonwealth Seniors Health Care Card (CSHC). Eligibility is based on income and there is no assets test for the CSHC which is why assets such as Superannuation (accumulation) balances are not relevant for determining eligibility. With pension accounts, the value of the account is not assessed; Centrelink is only focusing on the income (pension) received. The current maximum assessable income to qualify for the CSHC is:

Single $57,761

Couple $92,416

The CSHC offers several benefits for seniors. This article explains how eligibility for the card is determined and provides some useful strategies to help you obtain or retain the card. Further information is available at

https://www.servicesaustralia.gov.au/individuals/services/centrelink/commonwealth-seniors-health-card/who-can-get-it/income-test

The CSHC entitles holders to:

  • Prescription medicines at concessional rates through the Pharmaceutical Benefits Scheme (PBS)
  • The Medicare Safety Net threshold available to Commonwealth concession cardholders
  • Bulk billed GP appointments (at provider’s discretion).
  • The CSHC can also entitle holders to other concessions from state and local government authorities, including:
    • Free ambulance transport in case of an emergency in New South Wales
    • $200 energy rebate in New South Wales
    • A once-only stamp duty concession when buying a home valued at less than $750,000 in Victoria
    • A ‘cost of living concession’ is a South Australian government payment towards living expenses.

Existing CSHC holders who have held the CHSC continuously since 19 September 2016 are eligible for the energy supplement. This is a quarterly payment of $92.66 for singles and $69.66 for each member of a couple.

Other holders of the CSHC who are entitled to the energy supplement include:

  • CSHC holders who were receiving an income support payment, including the energy supplement, on 19 September 2016 and who then subsequently become a continuous holder of the CSHC will also continue to be paid the energy supplement. Please note this is subject to successfully lodging a CSHC claim within six weeks from the day their income support payment ceased.
  • Indefinite cardholders who remain continuously eligible for the CSHC will also receive the energy supplement.

Centrelink Gifting Rules

  • Changes to the pension assets test introduced effective from 1 January 2017 have created a renewed focus on gifting strategies. Self-funded retirees are not impacted by this. For Age Pension recipients who are asset tested, gifting within the limits can provide an increase in pension entitlements of nearly 8% pa. However, the gifting rules are complex. Centrelink assesses gifting against two limits – $10,000 per financial year and $30,000 over a rolling five financial year period.
  • The intention of the $30,000 over five financial years rule is to limit the increase in social security entitlements, such as the age pension, which can be achieved by gifting amounts on an ongoing basis. However, the two gifting rules operate concurrently and contain provisions to avoid excess gifted amounts from being assessable under both rules – which causes confusion.
  • Research indicates that the optimal result from gifting by someone subject to the Centrelink assets test is achieved by taking advantage of the $10,000 per financial year limit for the first three years, as well as gifting any amounts that exceed the $10,000 limit as early as possible so that gifting ceases to be assessable by Centrelink at the earliest possible date.

 

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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