The Consequences of Lower Interest Rates

percentageWhen interest rates rise or fall there are always winners and losers. Just like grain prices or variability of seasons, nothing much stays the same and it’s being able to ride out these changes and, even take advantage of them, that provides the opportunity to prosper. Whatever happens, there are always consequences.

Ever since the late 1980’s when interest rates were in the high teens (some of us remember those horrid times), rates have gradually fallen to reach the current official cash rate of 2.5%. Our Reserve Bank Governor, Glenn Stevens, alluded last week to the possibility of reducing rates further in a bid to lower the value of our currency.
The most obvious consequences of lower interest rates are:

  • Savers get punished
  • Borrowers generally benefit
  • We attract less foreign capital
  • Exporters benefit because of lower exchange rates
  • Importers are less competitive because of lower exchange rates
  • Investors are subtly ‘forced’ to invest in higher risk assets
  • It’s likely that market excesses and financial bubbles are created because of cheap money

I have read a number of articles recently that all point to most countries looking at ways to make their exports more attractive by lowering their currency exchange rates. We are in global economy where we are all now so interdependent on each other. So, if a country forces their interest rates and/or currency down, this changes the game for everyone.

A good example of such consequences is Holden and Toyota who are planning to cease manufacturing here. They are struggling to compete. I read recently that an Australian made Toyota Camry is around $3,600 more expensive to manufacture than in other countries! One of my concerns is the complacency and attitude to debt – especially with those who haven’t experienced the impact of high interest rates.

Not only is this a major problem with people in general, but local, state and Federal Governments are currently seeking approval to raise debt limits. This is a sad state of affairs. Personally I feel that we have experienced at least a generation of the best of economic times and sadly our overall debt has increased because money is cheap.

As I mentioned in the first paragraph, nothing stays the same and there are always consequences. We are definitely heading into new economic and social territory. Being prepared for change and how you can benefit is the essence of what planning is all about.

We’ll be in Wudinna in the 3rd week of December 2013 and be pleased to meet you.

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