Home Australia Interest rates at 1pc may be new for Australia, but we’re just following everyone else into the basement

Interest rates at 1pc may be new for Australia, but we’re just following everyone else into the basement

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Central bank interest rate cuts, such as the Reserve Bank’s plumbing of a new historic low of 1 per cent, generally inspire one of two emotions.

Option 1: Mild celebration among homebuyers. The 0.25 percentage point cut should deliver a $700 a year saving on a $400,000 loan, depending on the largesse of the lender.

Option 2: Mild irritation for those who base a large part of their income on interest payments from their savings, with some term deposits now offering rates well below inflation.

Those thinking outside the narrow confines of personal finance may pause and worry about the bigger picture.

The RBA’s cut to 1 per cent is an extraordinary state of affairs here, but less so in other economies where interest rates have been anchored near zero for years. In some cases rates have been held below zero.

Even at 1 per cent, Australia has higher official rates than most major economies; the US and Canada are higher, while Switzerland with its target rate deeply negative is in the basement.

Irrational times

Bank of America Merrill Lynch chief strategist Michael Hartnett has calculated that since the global financial crisis, central banks around the world have cut interest rates 715 times. Make that 716 after the RBA’s July move.

They have also purchased about $12.5 trillion (yes, trillions, thousands of billions) in bonds to try and keep things afloat.

“We are investing in an era of irrationality, impotence and inequality … Interest rates are at 5,000-year lows,” Mr Hartnett recently told his clients.

It is difficult to say what the global economy would have looked like without the concerted and co-ordinated cutting and bond buying, but pretty sick would be a reasonable guess.

However, despite that furious easing policy, things are still not looking great.

 

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