Will interest rates go lower?
Why are rates staying down?
It’s all to do with the cost of borrowing. The world is still grinding its way out of the 2009 GFC, so Reserve & Central Banks in many countries are keeping their interest rates as low as possible.
· It lowers the cost of borrowing for companies who make goods, supply services, and employ lots of people
· Lowering of interest rates helps “repel” inward money, which then tends to lowers exchange rates. This in turn helps their exports and also brings tourists into their country.
Many countries around the world have been doing this since the 2009 GFC. Many will keep their interest rates as low as possible, for as long as it takes, until their economies have recovered.
NZ has failed
New Zealand has not done well in this regard. Our Reserve Bank (RBNZ) is too focused on inflation and has stubbornly kept our interest rates higher than most other comparable Western countries.
The result of the RBNZ’s inflexible position is that NZ rates are 2-3% higher than many other countries. These higher interest rates attract investors from all over the world, from Belgian dentists to Japanese housewives. The more money that flows into New Zealand, the higher our dollar rises, and the more our exporters and tourist operators are hurt in the process.
Lower interest rates help people with mortgages, but this is not the intention of Central and Reserve Banks. In fact low mortgage rates, or “cheap money”, have fuelled an undesirable property boom in many major cities - a big concern for many Reserve and Central Banks.
But we heard that US rates are set to rise?
We hear again and again that the US Federal Reserve will soon raise rates. This is quite likely, but not by much, probably only up from around 1% to 2.5% to 3%.
The Fed is in no hurry to do so either, they want to be really confident that the US economy has well-established and continiung growth first.
The RBNZ are required to maintain inflation at between 1% and 3%. If our economy heats up, and inflation looks likely to get over 3%, they will raise rates (the cost of borrowing) to try and slow down the economy (and inflation). Of course, the reverse applies here too. It is important to note that the RBNZ is independent of the government in this respect.
The RBNZ is also involved in maintaining financial stability in New Zealand. They are fully aware that a bank failure in this country would be very serious indeed. This is why the RBNZ has been very vocal on the dangerously overheated Auckland property market, and have been taking some action to counter act it.
NZ trade with Australia
Australia is our biggest trading partner, but their base interest rate is only 2% versus our 3.5%.
Accordingly the NZ$ is relatively high against the AUD$. A strong NZ$ is not good for NZ exporters as it makes our goods more expensive for Australian consumers. A high NZ$ also makes NZ less attractive to Ozzie tourists, and a decline in demand for NZ goods, services and tourism will hurt our economy.
STOP PRESS !!
Wow – recently the RBNZ has taken notice and hinted (its called “jawboning” ) that they will gradually lower NZ interest rates. As soon as this news came out the NZ$ dropped. Thank goodness!
None of this helps Kiwis who need income from bank deposits
Sorry, but you are not on the RBNZ radar. However there are some things you should think about, and there are some things you can do:
· You should be diversified outside the big banks since they may not be entirely safe
· If you use your interest as income, you can’t grow your money
· For most Kiwis, bank interest as income won’t be enough
· Most of us need more – money at work
· Invested in bonds, property and shares
· Put some of your money into a conservative to balanced portfolio
· Given time, it should average 2% to 3% more than a bank deposit
Supplied by Alan Clarke, AFA 26532, financial & retirement adviser, & author.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available