More Evidence to Back Our Low Interest Rate Forecast

For some time we’ve tried to convince you that interest rates are staying low.

In fact, there’s a good chance interest rates could go lower.

It’s not a popular view.

Most people seem to think that interest rates must go higher one day.

And they will. But that day won’t be tomorrow, or next year. It won’t be five years from now either, or 10 years.

Our bet is that interest rates will stay low for at least another 20 years.

And thanks to news out last week, we figure the evidence is lining up on our side…

Last week the big four Aussie banks cut interest rates on fixed rate loans.

The mainstream press said it signalled a price war due to competition.

Not surprisingly, the mainstream has gotten it wrong…again.

The idea that there’s competition in the Aussie banking sector is laughable.

The big four banks control 84% of the Aussie mortgage market. The Aussie banking sector has favoured status. It has the gift of oligopoly from the Aussie government.

In short, it’s a legalised cartel. The banks don’t compete. They don’t have to. They know that for every customer they lose to a ‘competitor’, they gain one back from one of their ‘competitors’.

It’s the ultimate revolving door as punters go from one bank to the next. Little do they realise that each big four bank is just as good/bad as the other.

So don’t fall for the junk that competition is pushing down home loan costs. That has nothing to do with it. Here’s the real reason that banks are cutting interest rates.

Two reasons banks are cutting rates

Actually, there are two reasons for this move.

The first is that the banks know what we’ve known for the past three years — that interest rates are staying low for the foreseeable future.

By foreseeable future, we’re talking 20-plus years.

A report in The Australian quotes Clive van Horen, head of mortgage lending at NAB:

This is not about me or somebody else predicting what interest rates will do. It’s more about what the financial markets are saying. The market is saying that rates are going to be lower for longer.

Lower for longer.

Don’t fall for the bank’s coyness. It is the banks’ job to predict what interest rates will do.

If the bank can anticipate what the market or the Reserve Bank of Australia will do next, it could result in billions added to the top and bottom line.

So by cutting fixed interest rates, the bank hopes to entice borrowers into taking out fixed rate mortgages. If borrowers fall for it, the bank will get a nice profit boost if — as we expect — interest rates fall further over the next two years.

But as we said, there’s a second reason for the banks to cut interest rates.

The Australian report refers to it:

The price war has erupted just as concerns were starting to emerge that the boom in house prices — they are up 11 per cent on average over the past 12 months, according to Australian Property Monitors — poses risks for borrowers.

Unlike elsewhere in the world, Aussie house prices didn’t fall when economies collapsed in 2008.

Sure, highly leveraged and speculative markets such as the Gold Coast and parts of Perth suffered, but there wasn’t a widespread downturn.

Now, with Aussie house prices gaining 11% over the past year, the banks are no doubt worried what could happen if prices fall and if fewer people borrow to buy a home.

After all, if house prices rise, it means borrowers need to borrow more money. If incomes don’t keep pace with rising prices, it makes it harder to borrow. So, what’s the solution?

That’s right, a lower interest rate means lower repayments — or that borrowers can borrow more money and help support high house prices.

The solution to low interest rates is lower interest rates

That’s why the banks are really in a hurry to cut interest rates.

Don’t fall for the idea that it’s all about competition. That’s the last thing they have to worry about.

But whatever it means, the most important thing for you to know is that this market is playing out almost exactly as we predicted.

When interest rates stay low for an extended period, it’s important that they continue to remain low. Yes, we know that will create all kinds of problems. Low interest rates tend to result in bad investments and the misallocation of resources.

But that doesn’t really bother central banks and governments. They just want to make sure the world’s economy doesn’t go through a repeat of 2008. The one way they can ensure that is by keeping interest rates low.

Do you remember how central banks and governments responded to the problem of too much debt? That’s right, they created even more debt. It only makes sense that their solution for too-low interest rates will be to cut interest rates even lower.

This is exactly why we’re so bullish on the stock market. We’re not saying this will be sustainable forever. That’s why we don’t recommend you put all your money in stocks.

But until we see a sign that the markets have had enough of low rates and that investors are genuinely worried about the long term consequences of these policies, we’re staying the course.

Stocks are still a buy, and the Aussie blue-chip index is still on course to hit 7,000 points by early next year.

Cheers,
Kris+

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read. Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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