Last week the Reserve Bank gave a clear outline of its view of interest rates and the prospects for the economy. Governor Phillip Lowe said the bank's main aim currently is to create jobs and reduce unemployment. The RBA will use ultra-low interest rates to do this.
Extreme low rates will encourage consumers to borrow to spend and businesses to borrow to expand. They will force people with savings to take cash out of the bank and invest it productively. These influences will grow the economy and create jobs.
Lowe said unemployment is currently at 6.4 per cent and the RBA wants to see it below 4.0 per cent before it will consider raising short term rates. When unemployment falls below 4.0 per cent the RBA expects labour shortages in some industries, creating demand for wage rises.
Governor Phillip Lowe said the bank's main aim currently is to create jobs and reduce unemployment.
That will lead to increasing wages, something workers know has been missing for quite a while, and so rising inflation. Only then will the RBA raise interest rates to control inflation. Lowe expects that won't happen until 2024. So the RBA doesn't expect to raise interest rates for three years, unless low unemployment and rising inflation develop sooner, which seems unlikely.
Continuing ultra-low interest rates will be very stimulatory for the economy. In addition the Covid-19 pandemic is fading. New infection rates in the US and Europe are falling rapidly as there are fewer people never exposed to the virus, for it to spread to. The vaccine rollout is also helping.
The news is bad for savers and investors with money in the bank hoping for better interest returns. They have another three years to wait. Best they take time to investigate and learn about alternatives. Professional advice can help.
Those who are familiar with investing in property and shares had best get on with it. This can be done either with cash or funded by borrowings at very low rates, currently around 2.5 per cent if secured by property.
Some people are comfortable choosing and managing individual properties and shares themselves. Others lack the knowledge or desire to do so. For them, managed funds are the ideal solution. A team of professionals make the decisions for a small fee.
No expertise is required of the investor. They only need choose the type of fund that suits them.
It could be a conservative, balanced, or high growth fund. It could invest mainly in defensive fixed interest areas, in properties, or in shares, in Australia or overseas.
Returns are not guaranteed but are usually much higher than bank deposits.
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