How low will interest rates go?

KR Peters director Peter Nicolls says, while a 0 rate sounds implausible here in Australia, there is actually sense in the madness.
25-01-2021

If you have a 3 at the start of your home loan odds are you are paying too much. In the current low rate climate, your loan should start with a 2 and may soon start with a 1.

That is the astonishing prediction from NAB which has floated the idea that by June this year home loans could dip as low as 1.5%.

The further easing of rates continues a downward trend in interest rates over the past few years, accelerated by the Coronavirus. The need to prop up the economy in 2020 prompted the Reserve Bank to slash its cash rate to a mere .1%, an historic low.

And in some countries like Denmark consumers can secure 20 year loans at 0%. Other countries like Switzerland, Japan, Sweden and Spain have negative interest rates.

KR Peters director Peter Nicolls says, while a 0 rate sounds implausible here in Australia, there is actually sense in the madness.

"The banks would actually benefit as they could increase their fees and charges and claim it as a necessity to make ends meet and remain a viable investment for their shareholders," Mr Nicolls explained.

He said a 0% cash rate would also benefit state and federal governments, which have borrowed billions to support the economy and get it moving again post Covid.

Mr Nicolls said any further rate cuts would accelerate an already hot market, meaning home buyers would need to borrow more to enter the market, effectively resulting in more debt.

Lower interest rates would also be bad news for those who rely on bank interest for income, like retirees.

"Retirees will see capital growth in their assets, however a decline in their cash savings," Mr Nicolls explained.

He predicted investors would withdraw funds from banks where any decent return is unlikely and invest in property, further fuelling the market.

"It appears more likely than not that the next move with interest rates will be down, not up. It is hard to believe that interest rates have capitulated to such lows over such a short period of time," Mr Nicolls said.

The next announcement on interest rates will be made on 2 February when the Reserve Bank holds its monthly board meeting.