This is why cutting interest rates doesn't mean more investment

Emma Nedov of New South Wales competes at the 2016 Australian Gymnastics Championships in Melbourne. Quinn Rooney/Getty Images

The latest round of interest rate cuts will do little to encourage the big ASX-listed companies to invest more in their businesses.

More investment would mean a bigger business, more jobs and more taxes paid to a federal government in need of a revenue boost to fix a deteriorating budget deficit.

However, the pressure for listed companies is to increase or at least maintain the dividend payout to shareholders, according to analysis by Credit Suisse.

The extra cash goes towards keeping shareholders happy rather than investing for the future.

And this means that people won’t be spending more, keeping inflation low, one of the reasons the RBA has cut rates to a record low.

“While easier central bank policy has been effective in pumping up equity markets, it has failed to spur investment, in our view,” write analysts Hasan Tevfik, Damien Boey and Peter Liu in a note to clients.

“In fact, we believe lower rates is a reason for less, not more, capex as companies hold off new investment to keep their new income seeking shareholder happy.”

The analysts illustrate what happens with rate cuts in this flow chart:

They argue that the lower rates will further intensify the search for yield.

The dividend yield for Australian equities has compressed to 4.3% from 5% at the start of the year.

Credit Suisse estimates self managed superannuation funds will need to switch $10 billion out of cash into equities to maintain yield on their fund for each 25 basis point rate cut.

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