Interest rate movement unknowns vs. known fixed rate bond returns

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Recently, the OECD downgraded the growth forecast for Australia to 2.6% in 2013, from 3.0% just six months ago. The prior forecast made a year ago was 3.7%. Lower growth reinforces our view that interest rates will be lower for longer.

FIIG’s economist Dr Stephen Nash expects “a further 0.25% cut to 2.5% to the official cash rate, but if growth starts to moderate in the US, more than expected, the cash rate could fall further”. Assuming US growth remains on track, Dr Nash expects the cash rate to remain at 2.5% for the 2014 year.

Bill Evans, Westpac’s chief economist, is more pessimistic, "we retain our position that the terminal cash rate will be 2.0%, with single moves in August, late 2013 and early 2014”. He expects rates to reach a record low of 2.0%. Admittedly, he made these remarks before Federal Reserve chairman Ben Bernanke’s comments last night.

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