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ZERO PERCENT rates by 2010 forecasts economist: Variable versus fixed rates

A Sydney economist predicts that the Reserve Bank rate will be 2% by the end of 2009 and zero by 2010.

Steve Keen, University of Western Sydney’s associate professor of economics and finance maintains that the RBA’s concerns about high household debt levels will increasingly take priority over inflation, as deep rate cuts in 2009 fail to stimulate the economy.

''The debt bubble is bursting and when it bursts, people stop spending and borrowing,'' he said.

Keen’s announcement coincides with a warning issued by one of Australia’s largest independent mortgage brokers, Loan Market Group, who says more than 100,000 mortgage holders are missing out on the benefits of falling interest rates after locking into fixed rates of more than 8% over the past 12 months.

Latest figures from the Australian Bureau of Statistics show fixed rates of two years or longer were taken out on 126,054 dwellings in the 12 months to August, 2008.

Chief Executive of Loan Market Group, Jennifer Nielsen, advises mortgage holders to steer clear of fixed interest rates for the time being despite some substantial price reductions by the major banks.

“Fixed rates are great when you hit the bottom of the interest rate cycle but most analysts are saying that we aren't even close to this point,” she said.

Variable-rate loans track movements in the official cash rate, as set by the RBA. If the official cash rate goes up so does the interest rate on your loan, along with your repayments. Conversely if the RBA cuts rates your financial institution will correspondingly drop interest rates by at least a percentage of the central bank cut.

With fixed-rate loans, you lock into a term of usually one, three or five years over which the interest rate will remain the same. This works well when the expectation is that interest rates are going to rise or because you need some certainty about your repayments. The downside is that if rates fall, you'll miss out on the lower rate.

Professor Keen told Monday Confessions that when he made this forecast last month he was being conservative.

Tags: Mortgages, debt, interest, rates

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Permalink Reply by Natalie Bochenski on November 9, 2008 at 11:53pm

I heard a UK economist recently saying the same thing was likely to happen over there.

With their rates slashed to 3% just last week, they're closer to it than us.

I didn't think such a thing was possible; but I guess if you'd asked me what I thought the floor was on interest rates I wouldn't have been able to give an answer.

I've got a variable home loan; after two years of rises, it looks like the sucker is finally starting to pay off! :)

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Permalink Reply by jacquesk on November 10, 2008 at 9:28am

I am not sure if 0%. The only other country I know of in my admittedly limited experience to go to 0% was Japan and it certainly was their best time economically.

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Permalink Reply by JeffK on November 10, 2008 at 3:52pm

I'm reading a good book at the moment called Freakonomics - worth picking up as it's a book that will change the way you think and what you believe - and in it the author mentions how "experts" tend to overstate their case because if they don't then they're not heard. "Interest rates to fall further" won't get nearly as much attention as "Interest rates to go to 0%".

He uses an example of women's groups overstating the % of women who are victims of sexual assault, using the figure 30% when it is more like 12%. He outlines that no one in their right mind is going to question the figure of 30%, arguing that the women's groups know the figure is incorrect (based on statistics readily available to everyone). They also know that not only will it not be challenged, but also a higher figure is likely to get more attention, and therefore help them fight the issue at hand. With so much noise in the media, you have to be extreme to be heard.

This doesn't mean that rates can't go to 0% (or close to it). But given there is no precedent in Australia, it seems highly unlikely.