Interest rates; a race to the bottom? - Milford Asset

Interest rates; a race to the bottom?

Katlyn Parker

Investment Analyst

Katlyn is an Investment Analyst. Her primary role is to conduct fixed income research, focused on corporate bond markets.

Katlyn joined Milford in September 2015 after relocating to New Zealand from Ireland, initially as a Private Wealth Associate and most recently as an Authorised Financial Adviser. Prior to joining Milford she was employed by Davy Stockbrokers in Dublin.

Katlyn graduated with a first class honours degree in Actuarial Mathematics from Dublin City University (DCU).

Central banks globally, most notably the US Federal Reserve (Fed) and the European Central Bank (ECB), are now proactively shifting towards easier monetary policy amid slowing global growth, ongoing trade tensions and below target inflation.

Recent communications from the Fed indicate they are on track to lower rates. While an insurance cut at the next meeting looks very likely at this point, action beyond this may be more data dependent.

A more accommodative Fed, weaker economic data and subdued inflation has also led to the ECB putting all its policy tools back on the agenda including potential rate cuts and the reintroduction of quantitative easing.

Closer to home we have seen some central bank action to try and stimulate inflation. The Reserve Bank of Australia (RBA) has paused post consecutive 0.25% cuts and are now monitoring data with a continued focus on the labour market noting they will deliver further cuts “if needed”.

The Reserve Bank of New Zealand (RBNZ) have moved from a “balanced” rate outlook to an acknowledgement that a lower interest rate may be required over time. In May, the Monetary Policy Committee delivered the first rate cut since November 2016 with a possible further cut to come in August.

Growth, inflation and employment are vital to central banks being successful in delivering their objectives. A lack of inflation and risks to achieving central bank targets are key to this shift towards more accommodative monetary policy.

Source; Bloomberg

With inflation currently struggling to meet targets, central banks may be willing, over the medium term, to allow inflation to run above their target objectives. Indeed, some central banks are currently investigating whether they should target an average inflation rate over time rather than an explicit fixed target.

Unemployment is low across NZ, Australia and major economies, but wage inflation has remained at low levels. As stated by the RBA, this may imply that the maximum sustainable employment level is lower than previously thought.

The combination of these two factors and others tends to suggest that the hurdle for interest rate cuts is lower than previously thought and the probability of lower interest rates for longer has increased which is our core expectation.

Disclaimer: This article is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Past performance is not a guarantee of future performance.

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