11/07/2019 - 10:45

Disruption the result of a rates race to the bottom

11/07/2019 - 10:45


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OPINION: Long-term low interest rates could fundamentally alter the way the economy works, with significant social flow-on effects.

The RBA’s recent rates cut is unlikely to be the last.

Long-term low interest rates could fundamentally alter the way the economy works, with significant social flow-on effects.

A lot more than the cost of money changed recently when the Reserve Bank of Australia cut interest rates for the second time in as many months, starting with the obvious impact on property prices but also because of a potential workforce revolution.

The property effect, evidenced by an increase in successful auctions in Sydney and Melbourne the weekend after the cut, is a direct result of reduced mortgage costs (aided by easier bank lending rules).

The workforce change to follow is the flipside of the interest rate fall. Retired Australians understand the hardship caused by a cut in the return on their savings, while those planning to retire are shocked by what’s happening.

But events of today could be just a warm-up because there are almost certainly more interest rate cuts on the way, which will encourage potential retirees to reconsider, given many will not have sufficient savings to live comfortably.

Workers delaying their retirement will cause a ripple effect throughout the community as younger people looking for work, or a promotion, discover they’re being blocked by older staff who have taken a look at the future and opt to stick around to bolster their savings.

Piling pressure on to younger workers as prospective retirees delay their move is one of the unfair aspects to the latest interest rate cut. But it could get a lot worse because the game of rate cutting is far from over, and working into your 70s (and beyond) could become the new normal.

Past periods of rising and falling interest rates should have prepared most pensioners for the haircut they’re now taking. However, what’s happening overseas suggests the latest fall is not the last as the world prepares for a long period of ultra-low interest rates.

Historically, there is nothing new in decades of rates barely moving, though few people alive today have experienced rates stuck at 2 per cent or lower – not that even those times would have prepared anyone for a future of zero rates (or less).

What’s happening is such a big event there is probably not a section of the economy untouched because the cost of money effects everything, including an increase in risky investing in the hope of getting a reasonable return but almost certainly laying the ground for a future crisis.

A starting point in understanding what’s happening is to consider how far interest rates have fallen in Australia. Some are already below 1 per cent as clients of major stockbrokers have discovered, with one firm last week paying 0.86 per cent on cash on deposit.

In Europe some rates are already below zero, which means a depositor pays the bank for the privilege of parking their money somewhere safe.

A debate is developing in the US about zero interest rates triggered, in part, by demands from President Donald Trump for the country’s central bank to cut rates as a means of stimulating economic growth.

Gold was an immediate beneficiary of Trump’s rate-cut push, moving back above $US1,400 an ounce for the first time in six years. And even though it has slipped since, the prospect of interest rates falling to zero represents a compelling case for gold because the metal would find itself on an even footing with its arch-enemy, the US dollar.

The big game, however, is the prospect of rates staying low for a long time, which, according to a theory that emerged last month, could be forever.

Noah Smith, an assistant professor of finance at Stony Brook University in the state of New York, suggested that zero rates were appealing to the US government because it would make the national debt easier to manage, while rising rates on $US22.44 trillion of debt would eventually bankrupt the country.

No-one in government has yet suggested a long-term zero rate policy but there are ominous signs that interest rate policy is being used for more than economic reasons.

Over the past few months, Trump has been angrily denouncing rivals such as China and Europe for allegedly lowering the value of their currencies to gain a trading advantage over the US.

Trump’s response, a glimmer of which can be seen in his demand for interest rate cuts, could be to weaponise the US dollar, driving it down to boost the opportunities for US exporters, and to ratchet up trade pressure.

Because Australia is a trading nation, it would have no choice but to join this bizarre rates race to the bottom with all of its consequences, including a ballooning property market, higher gold prices, ageing workforce and rising youth unemployment.

Retail sales
Retail,, as everybody knows, is under pressure with the decline of the traditional shop having an unexpected negative effect on young workers trying to get a start, and a negative effect on older investors who once saw retail property as a reliable source of income.

But if anyone thought it was going to get better anytime soon, they need to consider the latest assessment of the market for shopping centres – because what started as a trickle of sales is turning into a flood as property owners rush the exits.

‘Gradually, then suddenly’ is the description used by investment bank Citi to describe the scramble in retail property as in-store sales are superseded by internet transactions.

According to Citi, the estimated value of Australian shopping centres for sale has reached $11 billion, close to three times the value of retail property transactions in every year for the past seven years when centre sales were valued between $3.5 and $4 billion.

It could get worse.

“We believe the large increase in retail assets for sale over the last 12 months has been accompanied by a further softening in the appetite to buy,” Citi said.

“Many owners are now selling retail assets for strategic or financial reasons, rather than asset-specific reasons.

“This suggests to us that many of the major players are unlikely to bid for each other’s non-core assets, further narrowing the potential buyer pool.”

LNG dilemma
The Western Australian government’s fence-walking on LNG developments just got a little harder, with the latest claim from green groups being that LNG is worse for the environment than coal because its methane emissions are harder to monitor.

That questionable point could be picked up by the government’s environmental watchdog and used to oppose new projects such as Woodside’s proposed Browse and Scarborough developments.


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