Rates at 1%? It’s not so crazy

Money Magazine Australia - - THIS MONTH -

Dili­gent savers, my­self in­cluded, have been pun­ished by the Re­serve Bank’s rate-cut­ting regime ever since the GFC hit, with in­ter­est rates down from over 7% in 2008 to just 1.5% to­day.

As much as I wish rates were go­ing to head higher in the com­ing years, I ac­tu­ally think the op­po­site will hap­pen, and they will be cut to 1% or be­low by 2020.

That might seem crazy but con­sider the facts. House­hold debt is at record highs; wage growth is non-ex­is­tent; un­der-em­ploy­ment is rife; in­fla­tion is be­low the Re­serve Bank’s tar­get band; and re­tail sales growth sug­gests con­sumers are in­cred­i­bly cau­tious.

Add to this the de­cline in the hous­ing mar­ket, which is wip­ing tens of bil­lions of dol­lars from the net wealth of house­holds, and the case for a rate cut is ac­tu­ally rather com­pelling, es­pe­cially if our banks con­tinue to hit bor­row­ers with out-of-cy­cle rate hikes, as they have done in the past few weeks.

The only ques­tion is, how low can they go? For me, we’ll see a cash rate of at least 1%, though I wouldn’t rule out the pos­si­bil­ity of it go­ing even lower than that.

Jor­dan Eliseo, chief econ­o­mist, ABC Bul­lion

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