Interest rates are again in the news. A view is forming that interest rates will need to start heading back up again as the economy starts to improve.
Interest rates are a tool which the Reserve Bank use to try to stimulate the economy. This can be highlighted by the below chart.
Unemployment increases is a clear sign that the economy is starting to struggle if you look at the below chart which covers a period from 2004 until 2013 you can see that before the GFC that interest were high and unemployment was low. This changed as a result of the GFC and according interest rates were cut to try to encourage business to borrow and kick the economy.
The next chart looks at the correlation between lower interest rates and the issue of new building permits. What this clearly shows is although initially the interest rate cuts saw a spike in new building permits being issued it quickly corrected itself and moved back to the long-term average. As such lower interest rates seem to have little effect on construction.
Lower interest rates do however boost consumer and business confidence and normally see an improvement in the stock market.
Retail sales tend to stay around the long-term average, however will be more volatile as generally times of low interest rates are also times of high unemployment as such there is less money available to spend.
So what does this mean for interest rates going forward?
I expect rates will stay low for longer as the economy still has some way to go before it has recovered.
We are getting close to the bottom of the economic cycle as we see higher unemployment.
The average person on the street is already or is about to go through the tough times along with small business.
I agree that confidence is picking up but it will take time before confidence converts into jobs and profits.