Rates will remain low
Glenn Stevens, governor of the Reserve Bank of Australia, also offered a long-term projection on interest rates in his Sydney
speech yesterday.
"All other things being equal, interest rates are likely to be lower in such a world than they were in a world in which households were extending their finances. This is a global phenomenon, but it holds in Australia too."
"A higher desired rate of saving means that the return to saving will, all other things being equal, be at a lower level as the market clears.
"Those who have long been savers no doubt feel aggrieved that the returns they have earlier enjoyed cannot be found as easily now. That is, in large part, because other savers have joined them and the market prices reflect that.
"Having said that, it is still possible to earn a gross interest rate on a bank deposit that is a bit above the inflation rate.
"A desire to hold savings in a less risky form means that the yield give-up to hold a safer asset is larger.
"The way this is usually expressed is that lower risk appetite, or perhaps a more accurate assessment of the risk that was there all along, means risk spreads are higher.
"Spreads are well down on the peaks reached at the height of risk aversion a few years ago, but do seem to have settled at a higher level than in the mid-2000s.
"Absolute borrowing costs for most borrowers are very low despite higher spreads, because the return on one of the least risky assets - the cash rate - is the lowest for 50 years or more.
"The market yields on government securities, the lowest risk assets of all, have likewise been very low."
Stevens said: "One of the things we have been watching for as we have been reducing interest rates has been an indication of savers shifting portfolios towards some of the slightly more risky asset classes, as that is one of the expected and intended effects of monetary policy easing. There are clearly signs of policy working in this respect, though not, to date, by so much that we see a serious impediment to further easing, were that to be appropriate from an overall macro-economic point of view.
"But successful 'rotation' of demand will probably also involve more net foreign demand for other Australian output of various kinds. Given that, the recent decline in the exchange rate seems to make sense from a macro-economic perspective. It would not be a major surprise if a further decline occurred over time, though, of course, events elsewhere in the world will also have a bearing on that particular price."