Australia Will Enjoy Low Interest Rates Much Longer But Economists Warn Of Problems Ahead

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Reserve Bank of Australia
Reserve Bank of Australia Danausi | Wikimedia Commons

The Reserve Bank of Australia (RBA) has set the July 2019 interest rate at 1%, a record low, and there are strong indications that level will not move up in years. Normally this is good news but economists are not entirely optimistic – they fear of possible rough times ahead.

According to ABC, the banking industry is estimating that the cash rate trajectory is going to be lower at least over the next three years or five years at most.

It’s quite obvious that the RBA is offering incentives for people and businesses to borrow money in the hopes of driving up economic activities, which betrays the long-term outlook for a bleak economy. This also means that for the long haul low interest rates are here to stay.

“The interest rate cuts are coming because of a softer economic back-drop,” per the same report, adding that the sentiment is true not only in Australia but also at a global scale.

“The reason why interest rates are going to be low, or lower still, is because of the economic back-drop ... As the months have gone on this year is starting to look a little bit worse,” the ABC report indicated.

If the situation will indeed drag on, economists warned that low wage earners in Australis will bear the brunt the impact of a feared downturn. They have little chance of getting pay hikes and at the same time, their savings will likely be depleted at a faster rate.

In the housing sector, the RBA said that while house buyers might be encouraged to get loans, the overall picture will not be rosy at all times. For one, the central bank has stated that asset prices going up will be part of the package .

“We can be confident that lower interest rates will push up asset prices, and I think that later on we will have problems because of that,” RBA governor Philip Lowe was reported by as saying.

Specifically, Dr Lowe warned the likelihood of asset prices creating a bubble that eventually would burst, which the report said has been the case in similar markets such as Canada and Australia.

Already, the country is witnessing bits of this possibility – the auction clearance rate has fully recovered from the declines that were seen in 2018. It seems one of the early and ominous signs that Australia will have pressing economic issues to deal with later on, as suggested by the RBA chief.