LAST week the Swiss National Bank cut its interest rate from minus 0.25 per cent to minus 0.75 per cent per annum.
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Switzerland has long been seen as a safe haven, especially since the global financial crisis. Now deposits with the Swiss central bank will be pruned.
Investors will get back less than they deposited.
The constant inflow of foreign funds keeps pushing the Swiss franc to levels that make Swiss companies uncompetitive.
The SNB wants to chase foreign investors away. Swiss government bonds also have negative interest rates - you must pay to own them.
Denmark, Sweden and the European Central Bank all have negative rates. Record low interest rates are in effect everywhere. Even in Australia bank deposit rates are very low and borrowing costs cheap.
The yields on 10-year Australian government bonds are below the 90 day bank bill rate and almost down to the Reserve Bank’s cash rate.
The bonds are paying 2.55 per cent compared to 2.7 per cent on bank bills and 2.5 per cent at the RBA.
This implies that traders believe shorter term interest rates will fall further. There has been much talk about additional interest rate cuts by the RBA due to the mining slowdown and a lethargic economy.
However, last week some economists dropped their forecasts of rate cuts due to strong employment growth in Australia in December. More new jobs were created than expected and unemployment fell despite the mining industry retrenchments and factory closures.
Perhaps people are worrying too much about the challenges facing Australia. Veteran retailer Gerry Harvey says sales at Harvey Norman were strong over the holiday period and he is optimistic about the year ahead.
Some analysts, including at ANZ Bank, are sticking to their forecasts of more rate cuts to come. They point to relatively weak economic growth figures.
How can we respond to and profit from these extreme low interest rates? They won’t stay low forever. Low borrowing costs and the collapse in energy costs will stimulate consumer spending and business expansion. As the economy improves interest rates will rise.
For cautious investors and those seeking income low rates are a problem. They could consider a capital drawdown strategy. This involves choosing a balanced or diversified portfolio and arranging a fixed monthly drawdown to provide cas h flow.
Home loans are cheap and business loan costs low. The lack of any real return on bank deposits and fixed interest is pushing investors to buy assets such as property, shares, farms and businesses. Increased demand will boost their values.
Therefore it makes sense to borrow to buy these appreciating assets now. Analysts at major US bank Morgan Stanley predict that this growth phase in global economies will last until 2020. However as rates will rise it is important to lock in a fixed interest rate loan for as long as possible.
Despite the low interest costs credit card rates show no sign of reducing. Most still charge around 20 per cent per annum. However there are several attractive offers available to anyone serious about paying existing debt off.
For those who ran up credit card debt over the holiday period two major lenders are offering 16 months interest free on balance transfers. These provide an opportunity for disciplined people to repay debts.
They should take up an offer and establish a monthly payment schedule that will see the debt paid off completely after sixteen payments.
They must not buy anything on the new card. Cut it up or lock it away. They should also reduce the limit on the old card to a very low level.
There are good strategies available to capitalise on low interest rates and we should all use those appropriate to our circumstances.