01/12/2008
Economic Update - How Low Will Interest Rates Go
Global economic conditions have significantly slowed during the past six months, with New Zealand, Germany and Japan already in recession. We are now potentially facing the worst global financial crisis in many years. Governments and Central Banks around the world have responded to these developments in a numerous ways. Most Governments have decided to adopt fiscal stimulus packages and measures to strengthen their financial systems. The Central Banks have been adding liquidity to their respective financial systems and cutting official interest rates.
In Australia, official interest rates have been already reduced to 5.25%, but will the Reserve Bank continue to cut interest rates in the future and if so how low will interest rates go ?
We believe further sizeable reductions in official interest rates are highly probable in the next six months. The Reserve Bank is currently forecasting that the Australian economy to grow by just 1.5% for the year ending 30 June 2009 and is becoming increasingly concerned by a deterioration in global financial conditions.
If the Reserve Bank decides to strike early and cut interest rates in December by 75 basis points to 4.5%, this will be the lowest level for official interest rates in six years. However, we do not believe that the Reserve Bank will stop at this level, further cuts in interest rates are highly probable. We believe that official interest rates will fall to below 4.0% in 2009, despite inflation currently running at 5.0%.
Hopefully, the retail banks will pass on the interest rate cuts to borrowers and the ultimate result will be a significant boost in consumer and business confidence.
Ross MacMillan holds a Bachelor of Commerce (Accounting, Finance and Systems) from the University of NSW, he is a member of the Institute of Chartered Accountants, member of the Securities & Derivatives Industry Association and a fellow of the Financial Services Institute of Australia.
Important Note: These articles have been prepared for general circulation and are circulated for general informational purposes only; these articles should not be regarded as business or investment advice. The articles represent the views of the writers and are subject to change without notice. Additionally, while every care has been taken in the preparation of the articles no representation or warranty as to accuracy or completeness of any statement is given. An individual or organisation should, before any business or investment decision is made, consider the appropriateness of the information in this document, and seek professional advice, having regard to objectives, situation and needs. This document is solely for the use of the party to whom it is provided.
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