There are plenty of economists and commentators who have been talking about interest rates being lower for longer. I have been amongst their number and it is interesting to look at some of the reasons interest rates are so low and then think about whether those drivers of low interest rates will persist.
Interest rates will stay low for some time because there are some major global trends which are pushing them down. These trends have reduced interest rates and will hold them down for the foreseeable future. Sure, interest rates will rise again at some point but, when they do, they seem unlikely to rise very much. We now live in a world that is very different and a rate of 8% or 9% is probably a very, very long way off.
This is because the trends which have pushed down interest rates are long-term secular trends and are well embedded into societies and economies. Interest rates are tied to inflation and these mega-trends are holding down inflation.
There are several trends which are keeping inflation down, but in my view, two of these are especially important. The first is technology, which holds down inflation in a number of ways, not the least of which is artificial intelligence and robotics. We do not see too much about automation in New Zealand but in some places, it is a very important factor for holding down wages and prices.
The car manufacturing industry is a particularly good example where there are factories busily making cars with hardly a person in sight: the assembly line is now a line of robots which assemble, weld and paint cars. This gives efficiency, better quality control and price advantage; in fact, it would be hard indeed for a company which makes cars with lots of people to compete and survive in today’s market.
Ecommerce also holds down prices. The ability to shop online opened up a global marketplace and it is easy to compare the price that you can get in your local mall with prices that you can get all over the world. The ability to conveniently shop globally has forced retailers to watch their prices and has lowered the price of many items.
The second thing holding down inflation is demographics: much of the world is getting older. Aging populations tend to consume less and that, in turn, means less demand. Lower demand puts downward pressure on prices and as the number of old people increases, spending on many items will reduce.
Neither technology nor our demographic situation are likely to go away anytime soon – they will both persist and continue to keep a lid on prices. That may mean interest rates go lower yet and then hover at low levels for a long time.
I would never say that interest rates will never rise, but I do think that we need to get used to interest rates that are lower. Of course, this is very good for borrowers while it is bad for savers.
Those who have been relying on bank deposits as their main long-term investment strategy need to think again: it could be a long time before they can get a deposit rate that is anything like what they could get in the good old days. In fact, many people ought not rely solely on bank deposits for their long-term savings but, instead, invest in a diversified portfolio.
People in retirement should take particular note: now that over 65s can join (or re-join) KiwiSaver they have a ready-made, well priced and well-regulated option to use instead of bank deposits. With interest from most Term Deposits at less than 3%, KiwiSaver or some other similar diversified fund, provides a very good option.
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Martin Hawes is the Chair of the Summer Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd and a Product Disclosure statement is available on request. Martin is an Authorised Financial Adviser and a Disclosure Statement is available on request and free of charge at www.martinhawes.com. This article is general in nature and not personalised advice.