Earlier this month, Australia’s Reserve Bank dropped the target for interest rates to its lowest rate ever. Or, as the Governor of the RBA actually put it: “the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic.” The immediate effect of this is that the target level of the overnight cash rate is now 0.1%. The flow-on effect of this is to dampen interest rates across the economy – as you will have noticed if you either have a loan or you have some money on deposit in an interest-bearing account.
While Governor Lowe specifically references the pandemic, the truth is that interest rates have been falling for years. Have a look at the following graph, from the website Trading Economics, showing the target cash rate since the last time that rate rose – in 2009:
The blue line is the target cash rate. The black line is a ‘trend line,’ showing the general movement in the target rate over the period. As you can see, that movement has been downward for many years now. The RBA’s response to the pandemic is, in many ways, simply the continuation of a long-term trend.
That said, there are elements of the RBA’s recent announcements that are very much related to the pandemic. In the same press release in which he announced the rate cuts, the Governor also stated that “Given the outlook, the Board is not expecting to increase the cash rate for at least three years.”
That’s right: the RBA has stated that it does not expect interest rates to rise for at least three years. The current low rates will be with us for quite a while. This brings an unusual degree of certainty to the interest rate decision for many people.
The RBA state that it is the fact that inflation is low that is behind its ‘confidence’ that interest rates will not need to rise. One of the RBA’s roles is to try to influence the economy so that inflation remains within its target band of 2-3%. At the moment, inflation is well below that and the impact of the Coronavirus has been to keep prices lower.
Whether low interest rates are good news or bad news for you depends on whether you are a borrower or a saver. One thing is for sure: the fact that we know that interest rates are unlikely to change for at least three years is highly unusual. Right now, financial plans can be built with an uncommon degree of certainty about what is usually a high-impact variable. After all, interest rates tend to have a flow-on effect to many other parts of our financial plan. Even basic things such as how much disposable income we have is affected by the rate of interest we are either paying or receiving.
So, if we haven’t seen you lately, now would be a great time to get in touch with us for a review your financial plan. Let’s make sure you get the most out of knowing what interest rates are going to be for at least the next three years.