Costello warns on rates

FUTURE Fund chairman and former federal treasurer Peter Costello has warned asset prices will fall and the cost of servicing debts will rise when – not if – interest rates go up.

Unveiling the fund’s fullyear results yesterday, Mr Costello said the biggest issue facing financial markets in coming years was a rise in interest rates to “more normal levels”.

“It’s been a long time coming, probably delayed a few times, but it will have to happen and when it does that will affect asset prices quite significantly,” he said.

“This is coming – it’s just a question of when.

“Whether in three months or six months or a year, it’s coming and people ought to start thinking about that.”

Mr Costello highlighted the high level of debt carried by Australian households and companies, saying borrowers may have to make higher debt repayments for assets that could fall in value when interest rates increased.

He was speaking as the

Future Fund reported an 8.7 per cent return for the year to June as its balance grew to $133.5 billion.

The return outstripped the fund’s modest target of 6.4 per cent for the year and was well ahead of the previous year’s 4.8 per cent.

The fund is now forecast to reach $200 billion in 10 years.

In line with his concerns about the impact of higher interest rates, Mr Costello said the fund had a relatively large stash of cash and would take advantage of “opportunities” to buy discounted assets.

“As rates rise you would expect that to affect asset prices – put pressure on some asset prices, put pressure on some borrowers,” he said.

“One of the things that might be helpful is quite a cashed (up) position and that’s where we come back to where we started: we do have a cashed position.”

The future fund had about $28 billion in cash at the end of June, making up 21 per cent of its assets, compared with 21.7 per cent a year earlier.

It has reduced its target investment return rate by half a percentage point to a range of 4 per cent to 5 per cent above inflation.

Mr Costello also welcomed the Federal Government’s decision not to make any withdrawals from the fund until 2026. The delay in withdrawals should allow the fund to grow enough to cover all Commonwealth superannuation liabilities, extending a further 60 years until workers’ pensions are paid out.

The Future Fund was set up in 2006 with proceeds from the sale of Telstra and surpluses in government budgets.

It is a sovereign wealth fund and the money can be used by the Government for any purpose, however, its original intention was to cover billions of dollars in unfunded super for federal employees.