Will Australian interest rates go negative?
Summary
In the midst of a global pandemic, with central banks providing significant liquidity to financial markets and experimenting with unconventional monetary policy, the prospect of negative interest rates is once again a focus and concern for fixed
income and cash investors. In short-term interest rate markets, the Bank Bill Swap Rate (BBSW) has traded below 0.1%, so Australia is already very close to negative interest rates, making it quite possible that yields could briefly trade below
zero.
CURRENT ACCOUNT BALANCE (% OF GDP)
Source: Bloomberg, June 2020
However, we believe the probability of persistent negative interest rates remains quite low in Australia, mainly due to the Reserve Bank of Australia’s preference for other monetary policy tools and the fact that Australia has a current
account deficit and a positive cross currency basis spread, both of which appear inconsistent with prolonged negative rates.
For rates to go sustainably negative in Australia, we would need these factors to change – possibly due to a combination of very weak inflation, a strong AUD and potentially a global move towards more negative rates. Given the uncertain
outlook and unprecedented level of central bank stimulus, we are clearly living through a period in which negative interest rates feel much closer to home for Australian investors.
About the author
Associate Director (Australia)
Kashi Trathen
Joined in 2013
Kashi is a portfolio manager in the Treasury Services team, responsible for strategy and implementation within the cash and fixed income portfolios. He also regularly contributes to FX strategy and execution, with significant experience in hedging interest rate and FX exposures using derivatives. Kashi joined IFM from Barclays, where he worked in rates and FX derivative structuring. He previously worked in fixed income trading at Deutsche Bank, dealing cross currency swaps, interest rate swaps and fixed income.
Bachelor of Economics (Monash University), Bachelor of Music Performance (University of Melbourne).
About the author
Senior Investment Writer
Jo Niall
Joined in 2019
Jo is a Senior Investment Writer in the Global External Relations Team who works closely with IFM’s fund managers to produce thought leadership articles and investor communications. Jo joined IFM from Legg Mason where she was a Senior Investment Writer but she also has nearly 20 years’ experience in trading and investment management positions. Her previous roles include Director, Asset Allocation and Strategy at Merrill Lynch Investment Management, where she was involved in the asset allocation of MLIM’s balanced funds and managing currency exposure. She was also an Economist at NSW Treasury Corporation and held various trading and economics roles at Bankers Trust Australia.
Bachelor of Economic Hons. (University of Sydney), Graduate Diploma of Applied Finance and Investment (Securities Institute of Australia)