Predicting what will happen to interest rates is a lot more complicated than just watching what the RBA does.
I know there are a lot of factors that will influence where interest rates will go in the future and I know a few things have occurred recently that really got Michael Yardney’s attention so I recently interviewed him for Real Estate Talk.
Here’s a transcript of that interview:
Kevin: What do you think will happen toward the interest rates over the next year?
Michael: Kevin, I think interest rates are going to be affected much more by what happens in the world outside of Australia more than what’s happening in our economy.
And there have been two factors recently that make me think that interest rates are going to remain low for longer than we’ve thought.
One is that not only is our economy growing below average, but the world’s economy is pretty flat.
The second big factor is that inflation is on the low side and falling.
Both of these factors suggest interest rates are probably going to remain low for a bit longer.
Kevin: So how much notice do you think the banks take of the RBA, or are they like you looking at a lot of these overseas influences?
Michael: Well, the banks’ interest rates are very much dependent upon the cost of their money.
And while some of it is related to the cost of money locally, with your or my little term deposits, more has to do with what the cost of money is overseas.
And this is very much affected by the two things we just talked about, so maybe we could break them down a bit?
Kevin: Yes, please do.
Michael: Well, first of all, recently the International Monetary Fund cut its growth forecast, interestingly for the third year in a row, and it’s actually urged nations to invigorate their economies.
The IMF are saying that the world’s economy is fragile and uneven – it expects world growth to be sub average for the next couple of years.
What this really means is that with low world economic growth, interest rates are going to remain low overseas. Interestingly, while America’s economy has started to pick up a bit, Europe’s is still a “basket case. ”
There’s almost a 50/50 chance of Europe falling into a recession next year.
Kevin: How will that affect Australia Michael?
Michael: While we don’t do that much trade with Europe, it will affect Australia.
You see… the world’s economy will remain flat and interest rates are likely t remain low overseas for a while, and at the same time the RBA is expecting Australia’s economy to grow at below its long-term average trends.
What this means is it’s likely that our interest rates are going to remain low for a while, – with economists predicting rates will be low for most of 2015 and early 2016.
Kevin: Michael, you mentioned inflation. What about that?
Michael: World inflation is currently low and likely to remain so for a while.
In fact, in many countries, inflation is falling. It’s doing so in Europe, in the United States, even in China and in Britain where the economies are pretty good.
Now, like Australia, other countries use interest rates to try and control their inflation rates.
If you think about it, we know the Reserve Bank uses interest rates to try and keep inflation between two and three percent here in Australia.
If inflation lifts, they raise interest rates a bit, and if our economy stumbles and the inflation drops, the Reserve Bank lowers interest rates to boost our economy, to increase demand and to generate more inflation.
What all this means for global monetary policies is that it’s likely that interest rates are going to remain low and money is going to become easier to obtain overseas, because inflation will remain low there.
The bottom line is that in this backdrop of a weaker world economy the Reserve Bank is really not have much scope to raise interest rates in the foreseeable future.
They don’t want high interest rates to bring money into our economy and lift up our Australian dollar. They also wont want to raise interest rates because that’s going to stifle our economy.
So for mine interest rates are going to be low for some time yet, and that’s clearly going to be positive for our property markets.
Michael: My pleasure Kevin.
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