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Interest rates pegged as ‘unsustainably low’

An economic forecaster has questioned the relationship between lowering interest rates and growth stimulus, saying low global cash rates cannot continue.

BIS Shrapnel chief economist Frank Gelber says the period of rate cutting that followed the GFC is now ending.

“We’re on the threshold of rising interest rates. It’s now just a question of when, where and how much but we do know we are at the end of this period of falling interest rates,” Mr Gelber told nestegg.com.au.

“Interest rates are unsustainably low on a long-term horizon, so we know they’re going to rise.”

Mr Gelber said rate cutting globally has proved ineffective in stimulating economies.

“Reserve banks around the world have learned the hard way that interest rates have very little impact on stimulating growth until businesses are ready to invest, so interest rates have gone out of play as a major policy variable in the US and Australia.

“It doesn’t make sense to invest unless you have capacity restraints and a market so in the US and here, weak profits and excess capacity mean you’re not going to invest just yet until there’s enough growth to absorb your current capacity.”

Looking to the global economy more generally, Mr Gelber said rising interest rates would be buoyed by slow growth, but growth nonetheless.

“The US should recover a little bit, and Europe’s coming through the worst of it so the world economy is on a slow path to recovery,” he said.

“Australia is not going to be much affected unless there’s a major calamity overseas or collapse, and I can’t see there being one. We’re possibly going to be more affected by interest rates, but we’re still an awfully attractive investment destination.”

Interest rates pegged as ‘unsustainably low’
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