Interest rates could stay low for longer than anyone now projects

02/02/2010 1:18 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The Reserve Bank of Australia, the country’s central bank, surprised just about everybody by keeping its benchmark interest rate unchanged today, February 2.

All 20 economists surveyed by Bloomberg had predicted a quarter-percentage-point increase to 4%. Futures markets rated odds of an increase at 74%.

Why do you care if you don’t live in Australia or own much in the way of Australian stock and bonds?

Because the decision indicates that central banks in the rest of the world are going to be very cautious, even more cautious than financial markets now expect, about raising interest rates very quickly.

The Reserve Bank of Australia’s pause came after three rate increases. Australia was the first country in the developed world to raise interest rates after the global economic crisis. And it has become something of an indicator for central bank interest rate policies.

The central bank’s decision to pause came as business confidence fell to a six-month low and evidence grew that the bank’s rate increases in October, November and December were hurting home sales. Borrowing for home buying fell to a five-year low last month.

The pause in interest rate increases sent the Australian dollar to a six week low after the central bank’s announcement.

In the long range, the pause certainly suggests that even when the Federal Reserve and the European Central Bank start to raise rates late in 2010 or early in 2011, the increases will be very, very gradual so that those central banks can be certain that they aren’t slowing what still looks like a below-trend economic recovery from a recession in those economies.

We could well have low interest rates for longer than almost anyone now expects.

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