Posts made in March, 2015

Are Low Interest Rates The New Normal? Comments Off on Are Low Interest Rates The New Normal?

Are Low Interest Rates The New Normal?

With the Reserve Bank of Australia’s (RBA) February 2015 decision to reduce interest rates to 2.25% the question becomes how long do we expect low interest rates to last? The best way to look at interest rates is to use real interest rates. Real interest rates are calculated by taking the actual interest rate and taking away inflation. For example if interest rates were 10.00% but inflation was 11.00% then effectively you are receiving -1.00% in interest. In contrast if interest rates are 2.25% but inflation is 1.70% (as at the time of writing) then the real interest rate would be 0.55%. Even though the nominal interest rate is lower (2.25% vs 10.00%) the real interest rate that you are receiving is higher and therefore better for you. If we take a brief look at history, we can see that interest rates were a lot higher than they are currently. In 2008 interest rates got up to 7.25%, and before that it was not until 1991 where interest rates reduced to below 10% after being extremely high for years. However as discussed before, the nominal interest rate isn’t important, it’s the real interest rate that is important. If we have a look at the last 14 years, the real...

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