Contact us now on 1300 664 118

How low can interest rates go?

//How low can interest rates go?

Good news for investors, bad news for savers.

If you are thinking of buying your first home or upgrading and renovating, then there has never been a better time to borrow as much money as you can.

If you are retired and looking for the best interest rates on offer, then keep looking.

In this newsletter we will look at the long term trends and why equities are best for investors, and why home borrowers can rest easy if they have secure employment.

The trend in home loan interest rates since 1959.

What does the Reserve Bank of Australia forecast for the next 4 years?

In Australia, the economic recovery is under way and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria. It will, however, take some time to reach the pre-pandemic level of output. In the central scenario, GDP growth is expected to be around 6 per cent over the year to June 2021 and 4 per cent in 2022. The unemployment rate is expected to remain high, but to peak at a little below 8 per cent, rather than the 10 per cent expected previously. At the end of 2022, the unemployment rate is forecast to be around 6 per cent.

When will the Reserve Bank expect to increase interest rates?

For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. Given the outlook, the Board is not expecting to increase the cash rate for at least three years.

So where should you invest your money over the next five years?

We expect a strong uptake in house prices as a result of lower than usual interest rates and the acceleration of growth back into the economy.

Over the last 50 years investors have been rewarded by investing in equities rather than cash and term deposits. In particular, U.S equities like the below chart shows :-

U.S shares grew by 11.5% over the period from 1970 to September 2020. For long term superannuation investors this was an incredible run. The Australian share market did relatively well over the same period growing at 9.4%.

The challenge for investors now is based on the Reserve Bank expecting interest rates to stay low and unemployment to improve post Covid -19. So where is the best place for your money in the future? The risk free rate of return is close to zero so the only option is equities that produce a dividend or property that produces a rental yield.

Predictions for the next 5 years.

“The stock-market cycle has four phases; hope, growth, optimism, and despair. Unless another wave of COVID-19 infections slams the economy, the market probably entered a new cycle and sits squarely in a fresh ‘hope’ phase”, according to Peter Oppenheimer, Chief Global Equity Strategist at Goldman Sachs.

The US economic recovery now rests on sturdier foundations as potential coronavirus vaccines show positive trial results, with widespread distribution lifting economic activity in the first half of 2021.

In Australia, we are already on the path to introducing a vaccine in late November and the aim is to have over 6 million doses by end of March 2021. This will stimulate the economy to spend and this will lead to an expected uptake in share prices.
A new cycle, featuring stable growth, inflation, and interest rates stands to last as long as the previous expansion and will lift stocks over the next 5 years.

General Advice warning: The content of this newsletter is for the clients of Best Interest Advice and it’s other related services. The content is general advice only and has not considered your personal situation or objectives and cannot be relied upon. Please consult a financial adviser to provide you with personal advice. We cannot guarantee the accuracy of this information as it is sourced from third parties and general media. All attempts to verify its contents have been made and we only rely on reputable sources.

By |2021-02-20T01:59:11+00:00November 14th, 2020|