We’ve been receiving a constant flurry of interest rate cuts in Australia and indeed the rest of the world. Here’s a list of the major central banks’ current official interest rates:
| Institution | Interest rate |
| Bank of Canada | 1% |
| Bank of England | 1% |
| Bank of Japan | 0.1% |
| European Central Bank | 2% |
| Federal Reserve | 0.25% |
| Swiss National Bank | 0.5% |
| The Reserve Bank of Australia | 3.25% |
So with Japan and the USA almost running at 0% I pose and attempt to answer the question – “How low can Australia’s interest rates go?”.
Interest rates have been used as a measure to control inflation in good times by increasing the cost of capital and in bad times to stimulate borrowing and hence investment into capital. This practise has been going on in one form or another since the Renaissance but it’s only really been strictly enforced since
the great depression.
Japan has had interest rates of near zero percent for over a decade now. It economy is in a slump. It seems as if it has nowhere to go and indeed this may be true. Capitalism relies on one basic principle. If you’re not growing you’re shrinking and it appears Japan is doing exactly that.
The greater the economy the more power it has to be able to reduce its interest rates to near zero percent. With the US still the largest economy in the world and Japan and China battling it out for second all three can afford to cut interest rates to practically zero to stimulate growth. However, It is not without cost.
A central bank needs to get its money from somewhere and with near zero interest rates the costs can be quite high. Either draining reserves or causing the country to blow out its foreign debt.
Australia does not have the clout globally to sustain near zero percent interest rates for very long. I’m not saying we couldn’t have 1% or there abouts soon but I really don’t see a sustained policy of very low interest rates. We just couldn’t afford it.
On a side note I don’t think as end consumers we’ll ever see anything less than 3.5% or there abouts as the big banks have so much power in this country that they’ll fight tooth and nail against any loss in their margin (the difference between official rates and home loan rates). You can see this in action now with many credit cards still charging close to 20% interest despite official rates having halved over the last year.
So in conclusion. If you were hoping for really, really cheap money I’m afraid you just aren’t going to get it. Australians are an optimistic bunch anyway. Can you imagine if we all had access to super cheap cash? We’d be up to our eyeballs in debt and flatscreen TVs.
