Normalcy returns to interest rates

DESCRIBING interest rates of the 1980s as an aberration, Mr James Leslie, of bond fund specialists Guinness Flight, said rates were unlikely to reach such peaks again for many years.

''Everyone under 45 thinks it is natural to have 10 per cent interest rates, but it is not, it is totally unnatural,'' he said.

According to Mr Leslie, the past 20 years have been an aberration in an 80-year period. Inflation has been abnormally high and interest rates have had to rise in an attempt to curb money supply growth.

''Until 1968, six per cent interest rates were considered high. We now think high to be 10, 11 or 12 per cent.'' He said the abnormal rise came about because of deficit spending for the Vietnam War and the oil crises of 1973 and 1979, all of which led to escalating inflation.

But with inflation having fallen to less than five per cent in many of the developed world's largest economies and interest rates having followed close behind, Mr Leslie believes there is no reason interest rates should reach the levels of the mid-1980s.

''Our view is that this time it is different,'' he said.

To support his argument for continued lower inflation, he points to four key factors: low commodity prices expected to remain low due to new producers; an oil price that is not going up; low wage push inflation because of the reduced role of unions; and industrial over-capacity.

''Interest rates don't need to be high if inflation is low. If you can break the inflationary spiral there's every reason to believe interest rates will perform in the six per cent band. Not for six months or 18 months but maybe 20 years,'' Mr Leslie said.

With continued high inflation, Hongkong was an anomaly, he said.

As part of a fund management group that specialises in bonds, Mr Leslie uses this argument in encouraging investment in currency denominated bonds whose capital value rises when bond yields fall.

''As the statistical evidence of low inflation and low growth mounts, bond prices should rise,'' he said.