Low rates 'the new normal': Kolenda

The continuing impact of the global financial crisis (GFC) means interest rates will remain around their current historical lows for the next decade, according to 1300HomeLoan’s managing director.

John Kolenda said lower rates are “the new normal” in the post-GFC world, with consumers now accustomed to them and likely to be highly sensitive to any future increases in rates.

“Variable interest rates over the last 50 or more years have averaged around mid to high 7.0 per cent range, but for the next decade we will see a much lower average variable rate,” he said.

“Considering the recent hikes in rates made by many of the lenders, we would have seen variable rate averages of around the mid to high 4.0 per cent range. The new norm of the future will see variable rates stay below 7.0 per cent with an average far less than the historical past.”

Mr Kolenda said the GFC has changed society and consumers are generally more sensitive to economic conditions and what is happening with interest rates.

“Post-GFC we have seen a dramatic change in consumer behaviour as they prefer to save money and spend wisely versus the credit spending frenzy for the decade before the GFC,” he said.

Mr Kolenda said the Reserve Bank’s attempt to stimulate the economy by reducing the cash rate in February and May has not worked in many cases due to the dramatic change in consumer behaviour and sensitivities to the broader concerns of the economy.

“What it does highlight though is that any future rate increase will result in a dramatic halt to consumer spending and confidence which in turn will slow the economy,” he said.

“The RBA will have to tread carefully with rate movements as gone are the days of increasing rates consecutively in an attempt to slow inflation. The world has changed and consumers will sharply react to measures taken by the RBA when the central bank does consider increasing rates.”

Mr Kolenda said the slowdown in China, and the rest of Asia in particular, remains the big concern for the Reserve Bank and a strong argument for cutting rates next month and into 2016.

“Of course, if the RBA does reduce its cash rate going forward, it remains to be seen how much of the RBA’s rate reduction is passed on by lenders currently facing additional compliance and provisioning costs,” he added.

[Related: Interest rates to remain 'very low' for years, says RBA]

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