There are signs that the Reserve Bank of Australia is close to again lowering interest rates and it is expected that in June our rate will fall from 3% to 2.75%. No doubt that those with a mortgage will celebrate because monthly repayments for a $ 300,000 loan will decrease by $ 90 a month.
The business community will also cheer because a drop in family outgoings may result in an increase in retail purchases, and the retail sector has been doing it tough for a long time - since the start of the great GFC in 08.
Unfortunately, this coin has a reverse side, and we may not like what that will deliver. The money stashed away in superannuation funds needs to grow to meet our retirement needs, and as interest rates shrink - so does the capital increase from investments. That money is useless just laying in a bank. It needs to earn interest, and fund managers will be pushed to consider riskier action plans as the traditional earning channels dry up.
The financial gurus extol the mantra that low interest rates spike investment, but that is not the picture we are seeing in Europe. The European Central Bank has just lowered interest rates there from 0.75% to 0.5%, and Japan has weathered decades of negative economic growth with interest rates near zero - and no rapid recovery. In contrast, Australia has survived the GFC far better than most competitive countries - and our interest rates have been higher by comparison.
When interest rates decline, those with money to invest look to other avenues of profit - and that usually produces " bubbles " of one sort or another. We experienced the trauma when house prices expanded beyond reason just before the GFC hit - and the mess that caused hurt a lot of people. A surge in stock exchange prices could be an expected outcome of low interest rates. Expect stocks with a good history of paying attractive dividends to find favour with buyers.
Finance is a tangled world of many factors working in opposite directions. One of the outcomes of higher interest rates is a strong Australian dollar, and this makes our exports more expensive. At the same time, it lowers the price of the goods we import from other countries, hence it delivers mixed blessings.
Pity the people at the Reserve bank who have the responsibility of making these decisions. It is impossible to please everybody - and those decisions will have a critical effect on various segments of our economy.
Lets just hope that they get it right !
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