B Invested

Nathan’s Prediction: 0% Percent Interest Rates

Since 1960, the average interest rate on standard variable loans is up around the 7% mark according to the Reserve Bank of Australia (RBA). There have been times of super high interest rates. Ask anyone who was paying off a mortgage in the late 1980s and early 1990s and they’ll tell you they were paying about a quarter of the value of their house every year in interest. Can you imagine?

There have also been times of super low interest rates…like right now. But the low interest rate times are dragging on and on with no end in sight. And for the first time in a long time, the historical average is actually being shifted downwards as a result.

We still hear predictions that rates will rise soon. Banks are already hiking their fixed rate products, so variables will follow suit soon won’t they? The RBA will finally take action and raise official cash rates to rein in the out of control housing boom that is seeing prices skyrocket all over the country. Won’t they?

Computer says no

One person who doesn’t think interest rates are going up anytime soon is b Invested founder Nathan Birch. In fact, for some time now, he’s been predicting official interest rates will actually go into negative territory.

It’s already happened overseas in places like Denmark and Japan. Australia may be an island in the far flung stretches of the South Pacific, but we are very much subject to many of the headwinds and indicators that drive the economies of the rest of the world. And right now, most countries in the western world at least are in a lot of debt and mired in uncertainty caused by rolling Coronavirus lockdowns.

There is a huge percentage of the world population relying on economic stimulus at the moment- indeed more than 2.6 billion people are under some form of pandemic restriction as we speak- so how could people afford interest rates to start rising?

Knowledge is power

Just over five years ago, Nathan Birch posted a bold prediction on social media. Like always, he had been watching economic indicators intently and came to the conclusion that, based on trends over a number of years, plus ongoing conditions, Australia was headed for negative interest rates.

Here’s his post in full from 31 July 2016:· 

I feel there is a 70% chance of rate reduction tomorrow to 150bp from the RBA (1/4 percent). If not tomorrow we will see it 100% within the next 3 months.

We are on our way to 0% interest rates and money is no longer created from saving trash (I mean cash) it is made with hard core assets attached to debt where the debts get deflated down and you can pay them off with inflated cashflow in the future.

Don’t believe me? Just remember where you saw the commentary first and witness where the smart money made sitting on the sidelines and check back in 5-10 years…

And the result?

He was correct, the interest rate was reduced the next day. And ever since, Australia has been marching towards negative interest rate territory.

When the RBA said it wouldn’t consider an interest rate increase until 2024, a lot of people saw this as evidence that it would definitely be moving up and began to speculate it could rise even earlier. But think about what the RBA has said in the past. At the beginning of 2019, the RBA said it was likely to raise interest rates in the coming months. Since then, interest rates have fallen 6 times! So when they say they are in no mind to increase them for years, it stands to reason they are less confident than they were in 2019…doesn’t that mean more reductions are likely?

The official cash rate has not been raised once in more than a decade and there is nothing in the current economic climate to suggest it’s going to happen anytime soon.

Ground zero

So what happens when we get to 0% official cash rates and then into the negatives? Well, people paying off quality assets will benefit because loans will become cheaper. People who have been saving money in an account will be the big losers as their cash will be worth less and less. If that’s not enough of a reason to invest in property and sit back and watch your debt get inflated away, then nothing is.