Low interest rates: Why should I care?

This is the first of a four part Coffee Conversation series brought to you by CIMB where its private banking economist - and foodie - Song Seng Wun makes simple even the most complex of economic brews.

Interviewer: Why is everyone talking about low interest rates now?

Mr Song: Interest rates have been abnormally low since the global financial crisis in 2009, when central banks around the world slashed borrowing costs in order to encourage spending and economic growth. But a normal economic cycle takes about 10 years so interest rates should have risen by now as consumer demand, inflation and growth get back on track.

Yet eight years on, this has not happened. With consumers and companies still selective about what they spend on, the global economy is not growing at a strong enough pace to generate wage inflation and a shift in inflation expectations that would require central banks to raise interest rates to encourage savings instead of spending. As a result, the record-low rates that we have seen the past seven years is something of a record in itself.

Interviewer: So this means I have to pay less interest on my loans? Isn't that a good thing?

Mr Song: Great if you borrow money and put it into productive use to turn a profit with the funds you borrowed. Great if you are servicing a mortgage. Not so good if you are the lender. Think of it as super-cheap kopi. At first it's shiok, but having too much of it will give you a headache, and the kopi uncle will soon find that his customers are cutting back on their kopi consumption because they are sick.

Low rates mean cheaper loans, but also lower returns on safer investments such as government bonds. As such, it has become harder for people to save for retirement or other plans. To make up the gap in returns, some investors are turning to higher-risk investments.

Interviewer: When interest rates eventually rise, what will this mean for me?

Mr Song: Higher rates can affect many aspects of everyday life, from the payment of credit card bills to the servicing of housing and car loans. This is because higher rates are likely to be accompanied by rising borrowing costs. And so while your savings account can earn more, you will have to pay your lender more for any loan you want to take.

While there is no need to do anything rash in the event of rising interest rates, consumers can consider, for instance, refinancing their variable rate loans such as floating mortgages to fixed-rate debt, and paying down high-interest loans as quickly as possible.