philip lowe : investing in a low interest rate world address by mr philip lowe, deputy governor of the reserve bank of australia, to the commonwealth bank of australia ’ s 7th annual australasian fixed income conference, sydney, 21 october 2014. * * * thank you very much for the invitation to speak tonight at the commonwealth bank ’ s 7th annual australasian conference. i would like to extend a particularly warm welcome to those of you who are visiting australia to gain first - hand knowledge of our economy and our financial markets. welcome to our shores. the general topic that i would like to speak about this evening is investing in a low interest rate world. no doubt this is an issue that you have all pondered over recent times. no doubt you have all thought about which assets offer the most attractive returns in the post - crisis world in which interest rates in many countries are extraordinary low. and no doubt you have thought about the risks that come with those assets. i am not a financial advisor, so i will refrain from giving you advice on how to grapple with these difficult issues. but i would like to talk about a couple of the general challenges that we face in this world of low interest rates. the first issue has an international dimension and it has been the focus of many of the discussions around the g20 table this year – and that is, how do we translate greater risktaking on the financial side of the economy into greater risk - taking on the real side. the second issue, which has a more domestic focus, is recent developments in the australian housing market. the international challenge it is useful to start with a reminder of just how unusual the current global environment is. interest rates are as low as they have ever been in most advanced economies. in the united states, the euro area, japan and the united kingdom official interest rates are essentially zero. in germany, investors actually pay the government for the privilege of lending to it for terms of three years or so. and in the euro area, banks are now faced with negative interest rates on their deposits at the european central bank ( ecb ), and the ecb is prepared to lend money to banks for terms of up to four years at just 15 basis points. a number of the major central banks have also engaged in very substantial money creation to buy large quantities of assets from the private sector, including government bonds, assetbacked securities and equities. as a result, financial institutions are holding record balances at central banks and

that determine the trend change in prices. as a measure to prompt an improvement in the aggregate supply and demand balance, in terms of interest rates, the bank has kept the policy rate at the effectively zero level. to encourage a further decline in longer - term interest rates in the money market, the bank introduced in december 2009 a new funds - supplying operation, through which funds with a maturity of three months are provided at an extremely low interest rate of 0. 1 percent, and the total amount of loans to be provided through this operation was set at approximately 10 trillion yen. the total amount of loans was increased to 20 trillion yen in march 2010. in terms of funds provision, the bank has been providing ample funds through various fundssupplying operations, including the new operation. furthermore, the bank has made its stance clear that it will consistently maintain the extremely accommodative financial environment. as for inflation expectations, the other determinant of prices, the bank has, to prevent people ’ s expectations for prices from declining, clearly showed its stance, in the form of the “ understanding of medium - to long - term price stability, ” that it is critical to achieve a positive year - on - year rate of changes in the cpi. to overcome deflation and achieve a sustainable economic growth with price stability, the bank will continue to consistently make contributions as central bank.