Economics & Markets

Is keeping rates so low "unnatural"?

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

AMP Capital Chief Economist Shane Oliver says investors must get used to ongoing low returns on bank deposits, with the Reserve Bank (RBA) unlikely to raise official rates for some time despite calls for action.

“We are of the view that rates will be on hold at least out to 2020,” he says. “The next move probably will be up, but I can’t rule out the next move being down.”

The RBA last changed interest rates back in August 2016 when it cut rates to a record low of 1.5 per cent. Following its meeting on July 3, the RBA has now held rates steady for a consecutive 22 meetings (accounting for the fact the RBA doesn’t meet in January, a 24-month period), a record length of inaction.

“When you see that record period of rates on hold people start to get agitated,” Oliver says.

Some people are now arguing that the RBA keeping rates so low for so long is unnatural, Oliver notes. They say the central bank should start raising rates to prepare Australian households for the eventuality that at some point higher global interest rates will flow through to higher Australian interest rates.

Oliver says all arguments are worth debating. “But I think it could be a major policy mistake for the RBA to prematurely raise interest rates just because the US has been raising rates,” he says.

The US economy is at a very different point in the cycle to the Australian economy, Oliver says. In the US, unemployment is at its lowest level since the late 1960s. “We’ve got relatively high unemployment; and relatively high underemployment. If you add the two together, it’s up around 14 per cent,” he says.

“In that environment, it’s very very hard to see wages growth picking up much in contrast to the US, and it is likely inflation [in Australia] is going to remain pretty low.”

Oliver adds that while US home prices are rising, house prices in Australia, particularly in Sydney and Melbourne, are falling. “We’ve got a very different environment in Australia compared to what you’re seeing in the US,” he says. “This is not the time to be raising interest rates just because the US might be doing so. We’re at different points in the cycle. Bottom line, we’re going to be on hold for some time to come.”

Oliver says that investors, particularly retirees relying on income from deposits, will need to accept we will remain in a low-rate environment for some time. “You’ve got to get used to ongoing low interest rates and ongoing low returns from bank deposits. That is the reality we’re in. I think in this environment it would be the wrong thing to raise interest rates prematurely.”

Filmed July 31, 2018

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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