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Interest rates to stay put: McFarlane

THE Governor of the Reserve Bank of Australia Ian McFarlane has been at pains to point out that he does not envisage any movement upward in either the inflation rate or interest rates.

This does, however, beg the question of what factors would cause such an upward movement.

Russell Maddox from Macquarie Funds Management pondered this question recently.

As he put it: “Interest rates have been in a downward spiral for much of this decade following the double digit days of the 1980s.

“Back then, interest rates hit their highest level ever at more than 18 per cent. While this was good news if you had savings in term deposits, home owners found themselves paying out much of their salary in mortgage repayments.”

“Then, during the recession in the early 1990s, rates began falling. With the exception of 1994, when fears of inflation combined with resurgent economic growth drove them up, rates have continued to fall to the current levels of around 4.75 per cent at the end of last year.”

The turbulence that was seen around the world, including the crisis in Asia and the collapse of the US-based hedge funds, led many analysts to predict a recession for Australia. Longer-term bonds became the popular choice of investors.

The local economy defied predictions and continued to perform strongly despite the surrounding turmoil. It is only recently that economists have increased their forecast growth rates to around 3 to 4 per cent.

The recent statement from Ian McFarlane certainly gives traders comfort that the strong position is expected to continue.

The only concern identified by Russell Maddox is possible fallout from the strife in the Balkans. At this stage, the fighting appears to have had no impact on any markets around the world. Economists are watching with interest, however.

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