Low Interest RatesApr 02, 2019
What Happens When Super Low Interest Rates Rise?
Whether it's your bank slugging you 19% interest on your credit card in 2017, or traders in Mesopotamia charging 20% in 3,000 BCE, interest rates have a long-held and important role to play in the financial system.
If you're a saver looking to earn interest, the higher rate the better.
If you're a spender with debt, then lower will serve you well.
And like a rollercoaster, they go up and down.
Source: Business Insider
Interest rates are currently at their lowest level in 5,000 years, hovering around the 1% - 1.25% mark.
And you (or your parents) might also remember when mortgage interest rates were at 17% here in Australia. That's pretty different from rates today, thank goodness.
Source: Loan Sense
You might think the US have the lowest rates around, but in some parts of the globe, rates are so low, banks pay you interest on your home loan. They're called negative interest rates, and they were happening in Denmark in 2016 (who interestingly, also offer 1,000 year bonds).
Now there's a policy that encourages people to go into debt!
You see, central bankers from around the world, like those at the Reserve Bank in Australia of the Federal Reserve (the Fed) in the US, use interest rates to try to manipulate, stimulate and manage economies. In simple terms, low (or negative) interest rates encourage spending, and high interest rates cause people to pull back.
Particularly since the GFC, bankers have been trying to stimulate economies by reducing and keeping interest rates low. And one of the impacts of this, is there's now a bull market in just about everything.
"More significant still is the behaviour of long-term interest rates.
We don't have to look too far to see the impact. Share portfolios have increased in value, and property prices have seen a rapid rise. We can't completely blame the Chinese buyers and SMSF investors for the property boom along the east coast - it's the low interest rates that have helped.
“While it might scare the pants off mortgage holders, interest rate