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Are baby boomers responsible for low interest rates?

Sebastian Bowen

The Reserve Bank of Australia (RBA) has caused a lot of controversy this year with its stewardship of our national interest rates. After cutting the cash rate three times in 2019 so far, rates are now sitting at a historically low level of 0.75%. Most commentators are expecting even lower rates next year, with a further cut to 0.5% largely canvassed.

These new lows have had both good effects and bad. Everyone with an existing mortgage would be cheering – variable loan rates are now at their lowest levels ever, and getting a mortgage approval with an interest rate in the 3% range is now common.

Savers are screaming blue murder though – bank accounts, term deposits and other cash instruments are now unable to keep up with even inflation. This has rendered any cash in the bank essentially impotent to contributing to investment returns, and had forced conservative inventors to stretch further out on the risk curve seeking yield.

Most commentators (including the RBA) have blamed both sluggish economic growth at home and low interest rates in other countries for this new paradigm. But according to reporting in the Australian Financial Review (AFR), there are other factors at play, including our rapidly ageing population. In the AFR report, it is noted that there are just over half the number of workers to support each retiree as there were in the 1970s. This is expected to roughly halve again by 2050.

No wonder Treasurer Josh Frydenberg described the situation as a ‘time bomb’.

But according to the AFR, it’s this same trend that is contributing to our ultra-low interest rates: “Ageing workers and retirees have created both a savings surplus and less demand for things to invest in, so the price on those savings keeps falling.”

Global technology and the economic transformations that come from it are holding global inflation down, but the surplus in savings from an increasing number of retirees is exacerbating this trend.

Foolish Takeaway

Unfortunately, from these statistics, it looks as though interest rates aren’t going to be climbing anytime soon. A potential solution? ASX dividend shares can offer yields that far exceed cash returns these days.

The post Are baby boomers responsible for low interest rates? appeared first on Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019