The fall of interest rates has been well documented in the financial media of late.
You've probably seen this chart from the RBA used a few times…
It seems a world ago when savers were receiving nearly 8% on term deposits, yet it was only 2008.
Now, they're staring down the barrel of just 2%, according to most analysts and economists.
That's great for sharemarket and property investors in the short term, but it could be potentially devastating in the long-term.
Let me tell you, it's a good thing Glenn Stevens is in charge of Australian monetary policy.
Too many senior economists are telling the RBA to cut.
Australia and New Zealand Banking Group (ASX: ANZ) said in March it expected three 0.25% interest rate cuts in 2015. At the time that forecast was made, it meant we should've been preparing for a cash rate of just 1.75% by Christmas!
Meanwhile, earlier this week, Westpac Banking Group (ASX: WBC) said a slight drop in consumer confidence results between March and April made them, "extremely confident" of an interest rate cut in May.
Zero rates?
When will interest rates stop falling?
At 2%? Unlikely.
What about 1%? Maybe.
0%?
How about negative interest rates?
Negative interest rates could be party-time for some (imagine getting paid for having a mortgage!), it could also bring terrible economic consequences (no-one knows for sure what will happen).
Now, we've already heard why the experts think interest rates are certain to fall (a plunging iron ore price, forecast rises in unemployment… the list goes on) but let's take a moment to think about why interest rates shouldn't be cut.
1. The property market – unless we see implementation of macro-prudential policy on loan-to-value ratios or changes to the incredibly biased tax regime which favours property investors; house prices will continue to sky rocket. In France, you can buy a 13-bedroom castle for the price of a 2-bedroom unit in Sydney!
2. Let's think about the savers.
Since the Global Financial Crisis, Australians have begun to save more. With falling interest rates, savers are earning less from their hard-earned cash, this could have the undesirable effect of pushing risk-averse investors into assets which they shouldn't be exposed to. It also slows consumption and has ripple effects on confidence.
3. The Australian economy is still strong!
The International Monetary Fund cut its growth forecast for Australia this week. The financial media called this a "warning for the RBA". That's complete nonsense. At a forecast rate of 2.7% in 2015, that's still well ahead of the average for advanced economies (which is currently 2.4%). Further, we're exposed to healthy long-term tailwinds such as rising energy demands (think: LNG production), a dining boom, education, services, wealth management and more.
So should interest rates really be pushing to new all-time lows when growth is still relatively strong?
Cautious optimism
To invest successfully over the long-term, I firmly believe investors should have an opinion on macroeconomic events but don't waste too much time on it. Cut through the noise created by the financial media to focus on the facts and the underlying businesses which you wish to buy.
If Australian interest rates continue lower than 2%, it may do more harm than good. Monetary policy can only do so much for our economy.
It's time for Australia's politicians (whether 'right' or 'left', it doesn't matter) to foster economic growth by stimulating the economy with accommodative fiscal policy, in the wake of falling commodity prices.
In the meantime, investors should go about their business with cautious optimism and ensure they have prudent levels of leverage, little to no exposure to expensive assets and keep a healthy cash balance for emergencies and opportunistic investments.
