Fixed Interest Rates May Have Bottomed
The Reserve Bank has been managing monetary policy to target low interest rates out to 3 years. We now have interest rates of approx. 0.1% pa. The Reserve Bank has achieved this by buying back 3 year bonds each month to effectively create additional liquidity in the market. It is anticipated that the Reserve Bank will own almost all the 3 year bonds by mid 2021.
As a result if is likely that the Fixed Interest Rates available to borrowers (typically 1 to 5 years) are at a bottom, as it is unlikely that rates will fall further (0% or negative).
This implies that borrowers could now benefit by fixing rates, and/or taking out new fixed interest rate loans to fund their purchase of home, business asset or other assets.
The Reserve Bank Activity
As COVID 19 has stalled the economy, The Reserve Bank decided to reduce short term interest rates (up to 3 years) to a target of 0.1%. The Reserve Bank has been re-purchasing short end government paper, effectively cancelling its borrowings and giving the market cash in return. This quantitative easing (“QE”) activity not only creates additional liquidity in the market but it also lowers interest rates, as The Reserve Bank is paying a premium to re-purchase the bonds.
Assuming that the Reserve Bank buys all the 3 year bonds by mid 2021, then The Reserve Bank will have less ability to influence shorter term interest rates past that point, implying that interest rates out to 3 years may have bottomed. Further QE activity could continue, with the next tranche of maturities (say November 2024), to keep 3 year interest rates low, but it is important to note that the Reserve Bank has already been buying some of these Bonds as part of the current QE program.
The Banks who intermediate much of the loans that consumers and businesses receive, benchmark their loan interest rates on the Government Base Interest Rates. So the activity of the Reserve Bank has a direct impact on the interest rates that consumers and businesses pay.
So, for those who are looking at fixing interest rates, this could be an appropriate time to fix rates.
If you would like to have a health check on your finances, contact us at Boston Money.
Sources: The Reserve Bank, NAB Business Research, ABC News
Written by Leo Economides
This document has been prepared by Boston Global. Documents published on this website are for general information only and are not intended to provide you with personal financial advice as we do not take into account your personal objectives, financial situation or needs. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Replication of this information requires prior approval and appropriate referencing to the entire document.