Home News How low interest rates affect the Australian economy

How low interest rates affect the Australian economy

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Since the global financial crisis of 2008, the Australian economy has done quite well, with its official interest rate above the average dictated by the Organization for Economic Cooperation and Development. This has encouraged significant foreign investment flows into Australia as global investors sought for a safe haven to park their cash as other strong economies like the United States, Japan, and Germany have entered zero or near-zero interest rate policy (ZIRP) or negative interest rate policy (NIRP) territory.

But today, ZIRP is considered as the new normal. After the global financial crisis of 2008, central banks and governments all over the world had been forced to adopt unorthodox and largely unprecedented strategies to prop up their economies. Both ZIRP and NIRP have been used to stimulate business and consumer lending in order to drive real economic activity.

In Australia, ZIRP has led to historic low mortgage interest rates and zero balance transfer rates for credit cards. However, it also left people without an incentive to save since the rates are so low. It also pushed the economy towards deflation as both goods and commoditized services are cheap. Pension funds' margins have also become smaller, thus expanding future liabilities and reducing the value of current superannuation yields.

Unlike the US Fed, the Reserve Bank of Australia is too conservative to fire up its printing presses and engage in rounds of quantitative easing. Instead, the Treasury has been forced to increase its borrowing, blowing out the forward fiscal projections year after year.

Until the Reserve Bank decides to expand its balance sheet via quantitative easing, the overburdened Australian taxpayer will have to shoulder the country's billions of debt.

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