If the forecasters are right, another Reserve Bank interest rate cut will be announced as soon as Tuesday.
That would bring the RBA’s official cash rate to a new record low of 1 per cent and drop the interest rates on many variable home loans to 3.5 per cent or lower.
Compare that with 7.25 per cent 11 years ago, or 17.5 per cent in 1990, and it’s a cause for celebration among mortgage customers.
And there’s good reason to believe that these low rates are going to stick around for longer than anyone previously thought.
In a speech in Adelaide this month, Reserve Bank governor Philip Lowe said it was unrealistic to expect that the one 0.25 per cent rate cut in June would be enough to boost inflation, wages growth and the economy to the desired level.
“The possibility of lower interest rates remains on the table,” he said, but declined to say whether the next move would be at its July 2 board meeting in Darwin. However, many economists and financial markets reckon it will, and are pricing in another rate cut very soon.
While Dr Lowe kept his cards close to his chest, as expected, about the timing of the next rate move, some of his other comments were enlightening about what is causing our ultra-low-rate environment.
He said it was unusual that Australia was experiencing both low unemployment and low inflation at the same time, and one reason for this could be that increased global competition had made people and businesses less certain about the future.
That certainly makes financial sense.
We’re all too scared to demand pay rises because globalisation has created a feeling of constant competition. If we ask for higher wages, our bosses might send our jobs offshore. If retailers raise prices, customers will go elsewhere looking for a better deal.
Technology is improving productivity and keeping prices down too. While wages aren’t growing as fast as people would like, the costs of many products aren’t growing quickly either so people don’t feel like they’re going backwards financially.
It’s not just Australia that’s experiencing this low rate, low unemployment and low inflation environment. The US lifted interest rates in recent years but looks ready to start cutting them again, and there are negative interest rates in Europe and Japan.
The longer Aussie interest rates stay low, the harder it will be to raise them significantly.
Households everywhere have become used to these low interest rates. So when the RBA eventually starts raising them again, they won’t have to go too far before borrowers freak out about the increased cost, stop spending, and send inflation lower again.
Imagine if your mortgage rate rose by $160 a month over a short period? And that’s just a 1 per cent rise for typical mortgage.
Getting back to a 6 or 7 per cent RBA interest rate appears almost impossible for many years. It’s frustrating for savers and retirees, but more good news for home loan customers.
Originally published as Why interest rates will stay low for longer