There is always a lot of chatter about interest rates and now is no different.
Most economists are predicting that rates will reduce at some point this year, because of our relatively flat economy.
However, going out somewhat on a limb here, I believe the cash rate will hit zero in the next few years.
The reason why I think zero, or very close to, is that inflation is so low that the Reserve Bank needs to motivate people to spend more money.
When you have interest rates going down, it almost is forcing people to say, “It’s not making sense for me to have money in the bank anymore”, so they start spending it on everything from assets to a new outfit.
One of the other factors behind this because lending restrictions are not likely to get any easier in the short-term, which will stymie in any real growth in the property market.
However, before they start cutting the cash rate to zip, I believe the order of economic stimulation will likely be personal and business tax cuts first, then reducing interest rates.
At the end of the day, small businesses are the backbone of the Australian economy so incentivising them to employ more staff will have a positive impact on the health of the economy.
Trigger timing
The thing is, the cash rate is 1.5 per cent, which means the Reserve Bank doesn’t have much left in the tank to stimulate the economy – contrary to the big rate drops that happened after the GFC more than a decade ago now.
So, there has to be a multi-faceted approach to kickstart the economy, that is more than just reducing rates by a few hundred dollars per month for most borrowers.
Recent data suggested that we are in a technical recession, according to per capita measures, with the economy declining by 0.2 per cent in the three months to the end of the year, following a 0.1 per cent decline in the three months to September.
Yet, the latest commentary from the Reserve suggests that rate cuts are not imminent.
In my opinion, I believe they are waiting until economic indicators are more concerning before pulling the trigger.
That’s because, if they cut the cash rate by 25 or 50 basis points now it’s probably not going to make much of a difference to the economy without the other elements, such as tax cuts, also in play.
It’s almost like they are keeping their cards close but are ready to make a move as soon as necessary.
The property price contractions in some of our major cities clearly are impacting consumer confidence.
That’s because if the value of your home has reduced, people feel poorer, so they don’t go on that holiday or eat out at that restaurant.
However, at the moment, the employment sector remains robust – especially in Sydney and Melbourne.
If that situation changes, though, then that is when stimulatory measures will need to be put into practice.
But where not in that situation yet – regardless of what the headlines might be shouting at us.
Market opportunities
As I’ve mentioned before, there remains myriad property investment opportunities, which won’t disappear just because interest rates drop.
There is a plethora of investment options in Brisbane, Adelaide, regional Victoria and Hobart, which is where we will likely see growth due to affordability reasons.
These markets also have higher yields, which means if we see interest rates drop it will increase your return on investment.
Those numbers will be attractive to savvy investors because they could either leave their money in the bank and earn a paltry two per cent interest, or they could invest in one of these locations, with long-term growth fundamentals as well as yields of five to six per cent.
As the old saying goes, the smartest investors buy when others are fearful because of the opportunities to cherry-pick the very best properties at bargain basement prices.
While I am predicting that interest rates might hit zero in the next year or two, that state of affairs doesn’t frighten me.
I believe there will be a rate reduction after the Federal Election this year, with another one by the end of the year, so the cash rate will be one per cent.
Next year, well, there are too many variables to accurately forecast what might happen then.
One thing is certain, regardless of who wins the election, no political party wants to be the government in power when Australia’s historic run of strong economic growth comes to an end.
And that means that there is much to gain in the market at the moment, rather than fearfully waiting on the sidelines for a situation that is unlikely to materialise.
