Why are markets predicting negative interest rates?

August 30 2019
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Financial markets are increasingly expecting the Australian cash rate to fall into negative territory, following in the footsteps of a number of the world’s developed markets.

Speaking at S&P Global’s annual Breakfast with the Economist series in Sydney, Su-Lin Ong, managing director and chief economist at RBC Capital markets, noted the rise in expectations of a negative interest rate environment in Australia.

This would be an environment where banks and financials institutions would pay the Reserve Bank of Australia (RBA) to hold excess cash reserves, encouraging investment.

“We’ve heard everyone from RBA governor [Philip Lowe] to deputy governor [Guy Debelle] talk about [a cash rate] somewhere around 0 per cent, 0.25 per cent and 0.5 per cent,” she said.

“It does beg the next question about what happens when we get to those types of levels. Do we adopt some similar unorthodox policy that we’ve seen around the globe? Do we go into that negative interest rate environment?

“While policymakers may be very reluctant to do so, financial markets are absolutely thinking about it, even here in Australia.”

Ms Ong acknowledged she believed Australia is a “long way off from that discussion”, but foreign markets are expecting the RBA to implement the measure sooner rather than later.

The economist stated that such expectations emerged as a result of trends in the domestic economy, which resemble those experienced in foreign markets prior to employment of negative rates.

AMP Capital chief economist Shane Oliver agreed with the stance and indicated that he does not expect Australian policymakers to take the same path trotted by foreign central banks anytime soon.

“[It] would make sense for the RBA to call a halt to cash rate cuts around 0.5 per cent or maybe 0.25 per cent,” Mr Oliver said.

“There would be little point in going to zero or negative as the banks will be unlikely to pass it on in lower mortgage rates as they won’t want to take deposit rates negative. So, negative interest rates will hopefully be avoided,” Mr Oliver continued.

In the medium term, both Ms Ong and Mr Oliver are expecting two rate cuts by the end of the year, meaning the official cash rate for Australia would be 0.5 per cent.

About the author

Charbel Kadib and Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Charbel Kadib and Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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