Low Interest Rates and Stock Price Bubbles

On Wednesday this week the Australian Bureau of Statistics (ABS) reported that inflation for the June quarter was 0.4%, down from 1% in 2015. This is watched very closely by the market, as it is a key measure used by the Reserve Bank of Australia (RBA) in making their decision on the official cash rate and increases the probability that the official rate will be cut to 1.5% in August. The benchmark Australian 10 year government bond rate, which is used as the risk free interest rate to invest in Australia, fell to 1.88% in anticipation of this further rate cut.

Low interest rates not only impact retirees looking to live of the income see Searching for Yield, but also contribute to asset price inflation. Whilst this might not be the most exciting of topics, it is important to investors, as assets from shares to real estate are currently being priced with the anticipation that historic low interest rates will continue into perpetuity! In this week’s piece we are going to look at how the steady twenty year fall in the risk-free interest rate has contributed to the asset price bubble we find ourselves in.

Read more here.

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