The Australian Financial Review Banking and Wealth Summit commenced on Tuesday, with many notable figures in attendance. Reserve Bank of Australia governor Glenn Stevens gave a speech in which he underlined several vulnerabilities in the Australian economy. Mr. Stevens warned that global retirement income systems are facing headwinds and are moving into a “much worse position” than those who retired a decade earlier. He cited the increase in the cost of purchasing an annual flow of future income as the reason for troubled retirement portfolios. He also cited the global trend of requiring banks to increase their capital ratios, a move that tends to make banks more resilient but can also push up borrowing costs. The RBA governor also remarked that there was a trade-off to be made on whether or not Australia’s banks should increase capitalisation.
Mr. Stevens was riddled with questions concerning the monetary policy of the country’s central bank. He said he had no comment concerning the upcoming board meeting on 5 May. During his speech titled “Observations on the Financial System,” Mr. Stevens asked a vital question: “The key question is: how will an adequate flow of income be generated for the retired community in the future, in a world in which long-term nominal returns on low-risk assets are so low? This is a global question.” He pointed out that interest rate cuts could negatively affect retirees. When retirees stop working, they rely on interest rates to give their savings a boost, he said. But when ultra-low bond yields around the world are falling, investors are forced into taking on more risky assets.