admin-ajax.php

Here’s 2 good reasons interest rates are likely to remain low

If you’re like me you’re keeping a close eye on interest rates.

Well… two bits of recent news make me think interest rates will remain low for some time to come:

1. A flat global economy

2. Low world inflation.

1. The global economy faces another five years of stagnation

The International Monetary Fund recently cut its growth forecasts for the third year in a row and urged nations to ­reinvigorate economic reforms.

The IMF says the global economic recovery remains “fragile and uneven”.piece_of_puzzle

It now expects world growth will reach 3.3 per cent this year, the same as last year, and 1.4 percentage points lower than it thought likely when preparing its forecasts three years ago.

Before the financial crisis, global growth rates in excess of 5 per cent were the norm.

“Demand shortfalls in advanced economies, together with the erosion of potential output, could lead to sustained global economic weakness over a five-year period,” the IMF report says. This is not yet its central forecast, but the fund sees it as the biggest risk to the global economy over the medium term.

In fact, as the following graph shows, while America’s economy is in pretty good shape, the risk of recession in Europe is around 40%.

While that may not directly affect Australia that much, overall stagnant world economic growth will.

recession

 Source: IMF

In response to this, the RBA is expecting Australia’s growth to remain below its long-term trend rates.

This is likely to keep interest rates low for a while with economists predicting rates to remain on hold until at least next year.

2. Inflation remains low

World inflation is currently low and likely to remain so for along while if our major economies are floundering.

[sam id=48 codes=’true’]

Currently three quarters of all OECD countries have inflation of less than 2%. In fact two thirds have an inflation rate of less than 1%.

CPI inflation rates are now falling, if anything. In Europe, inflation is barely positive at 0.3%, while in the US, the latest CPI reading showed annual inflation dipped from 2% to 1.7%.

Inflation rates have also declined China and Britain this year.

Now..like Australia,  other countries use interest rates to try and target inflation.

If you think about it…the RBA uses interest rates to try and keep inflation within the 2-3% target band.

If inflation lifts they raise interest rates to lower demand and stifle inflation. Similarly if inflation falls (the economy stumbles) the RBA would lower interest rates to boost the economy, to increase demand and to generate more inflation.

What all this means is that  global monetary policy is certainly going to get easier and global interest rates are likely to fall.

The bottom line:

This backdrop of a weaker world economy will leave the RBA with little scope to raise interest rates in the foreseeable future for many reasons including:

  • Higher rates will only encourage more overseas funds to come into our country, driving up our dollar, hurting exporters and undoing all the work the RBA had done over the last few years. Now that’s the last thing the RBA wants.
  • At the same time higher interest rates would stifle our local economy which is already under performing.

For mine: interest rates will remain low for some time yet and this will clearly be positive for our property markets.



icon-podcast-large

SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST

Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.

icon-email-large

PREFER TO SUBSCRIBE VIA EMAIL?

Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.


Avatar for Property Update

About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Here’s 2 good reasons interest rates are likely to remain low' have no comments

Be the first to comment this post!

Would you like to share your thoughts?

Your email address will not be published.
CAPTCHA Image

*

facebook
twitter
google
0
linkedin
0
email

Michael's Daily Insights

Join Michael Yardney's inner circle of daily subscribers.

NOTE: this daily service is a different subscription to our weekly newsletter so...

REGISTER NOW

Subscribe!