How low can rates go and what’s next?

How low can rates go and what’s next?

Good question. How does minus 0.1 percent sound? That’s what the interest rate is in Japan.
 
Theoretically that means banks there can charge a customer to park money in their account, or pay someone to borrow from them.
 
It’s a drastic ploy to stimulate an economy, but it won’t be happening in Australia anytime soon. Although the official rate is, at 1.75 percent, the lowest on record, Australia’s economy is in relatively good health compared to many other developed economies.
 
Unemployment is steady, growth numbers have been strong and the economy is slowly but surely shifting away from the mining investment boom.
 
When the Reserve Bank of Australia dropped the rate from 2 percent in May, it was in response to an inflation rate lower than what governor Glenn Stevens and his board believe is prudent.
 
Rather than indicate the low inflation figures were a temporary blip, the RBA said inflation was likely to remain below, or at the bottom end of their 2-3 per cent target.
 
And not just for the next few months, but for the next three years.
 
In the past, concern over strong growth in housing prices appears to have restrained the RBA from cutting the cash rate. Those concerns have now been dampened, with house sales and price growth in Sydney and Melbourne particularly coming off the boil.
 
A majority of analysts are firmly of the view that the next move in the official rate will also be down. They predict there will be one and perhaps two more cuts this year, which means a possible cash rate of 1.25 percent by Christmas. Uncharted territory.
 
While Japan’s rate is unusual to say the least, there are plenty of countries a hair’s breadth behind it. The Eurozone economies are at 0.0 percent, while Canada, the United States, Britain and the Scandinavian economies are set at 0.5 percent.
 
Clearly, Australia has some way to go before it reaches those levels. The RBA though is reluctant to go too low because it wants to keep some of its powder dry.
 
Interest rate manipulation is one of the few effective weapons it has to keep monetary policy on a healthy trajectory, so if it goes too low it won’t have any shots left to fire.
 
There are still plenty of people who look at the current 1.75 percent rate and shake their heads in disbelief, remembering that when they bought their first homes 30 years ago the interest rate was 17.5 percent, the highest it has ever been in Australia.
 
The upshot of all this is that there has never been a better time to borrow money to invest. With borrowing costs at an all-time low and likely to stay that way for a good few years yet, it is an ideal opportunity to look at buying a home, investment property or a share portfolio.
 

 
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