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A fresh take on falling interest rates


Milford Asset Management Senior Analyst Ian Robertson doesn’t consider the cost of borrowing is the main deterrent to businesses investing – so, a lower cost of credit isn’t likely to be the magic bullet to increase economic growth.

“I think any business will struggle to invest in that new project or hire that new employee if they’re concerned or uncertain about the economic outlook. New Zealand business confidence has been weak for some time. I can only assume that lower global growth and lower local growth as well as growing uncertainty internationally – not least because of the US-China trade war – will be weighing on sentiment and will probably be a bigger obstacle to overcome than the cost of borrowing.”

And he sees big traditional investors like superannuation and pension funds, and even insurance companies, confronting hard challenges in the low interest rate environment.

“Generally speaking, those investors should have done well year to date, in terms of the lower interest rates supporting the price of bonds, which increases bond returns – and it has also supported share markets. But going forward, we expect those returns to moderate. Bonds issued today are at a lot lower interest rates than they have been – indeed, a lot of the high grade government debt particularly in Europe is negative yielding – so, what it means for an investor like a pension fund [with an annuity business] is that they need to generate a certain level of return on their assets in order to pay those guaranteed annuity pensions and it’s going to be increasingly harder in a low return environment to generate those returns to meet those obligations.”

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In a low interest rate environment, depositors and investors are under greater pressure to chase after higher risk assets in an attempt to secure a return.

“This is a very real scenario. There’s a lot of money internationally chasing returns, so it’s not uncommon to see investors move further up the risk spectrum to get those returns.”

You can also view Ian’s interview discussing these and related issues, including the potential for interest rates to go negative, if you click here.


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