24/03/2015 CLSA's Christopher Wood says interest rates could drop to zero | afr.com TODAY'S PAPER VIDEOS INFOGRAPHICS MY AFR LOGOUT search the AFR NEWS BUSINESS MARKETS STREET TALK REAL ESTATE OPINION TECHNOLOGY PERSONAL FINANCE LEADERSHIP LIFESTYLE ALL Home / Markets / Market Data / Interest Rates Mar 19 2015 at 12:20 PM | Updated Mar 19 2015 at 4:03 PM SAVE ARTICLE | PRINT REPRINTS & PERMISSIONS CLSA's Christopher Wood says interest rates could drop to zero Advertisement CLSA chief strategist Chris Wood: 'It's not whether interest rates go up, it's whether Australian interest rates go to zero.' Photo: Chris Stowers A CLSA analyst who told investors to sell US mortgage securities before the subprime disaster says interest rates in Australia will be less than 1 per cent within two years and could even go to zero. Christopher Wood, who is the managing director and chief by Matthew Cranston strategist of the broking firm, is sceptical of both the impact and likelihood of a change in US monetary policy. This is despite the US Federal Reserve dropping the word "patient" from its statement on Wednesday, signalling an increase in interest rates by June, the first in nine years. "It's not whether interest rates go up, it's whether Australian interest rates go to zero," Mr Wood said in an interview with The Australian Financial Review. "I think less than 1 per cent within the next two years. They are going to end up a lot lower than people still imagine." The most recent Bloomberg survey of economists indicates an average interest rate forecast of 2 per cent for the end of the year and the first quarter of 2016. RELATED ARTICLES Kathmandu swings to loss 12 min ago | Coalition's fortunes diverge in polls 2 min ago | http://www.afr.com/markets/marketdata/interestrates/clsaschristopherwoodsaysinterestratescoulddroptozero201503191m2trv 1/4 24/03/2015 CLSA's Christopher Wood says interest rates could drop to zero | afr.com The economies on top in trade 15 min ago | LATEST STORIES Kathmandu swings to loss 12 min ago | Coalition's fortunes diverge in polls 2 min ago | The economies on top in trade 15 min ago | Advertisement Economists and strategists have been making huge calls on interest rates and currencies in the last few months, with Bank of America Merrill Lynch economist Saul Eslake saying interest rates in Australia would head back up to 2.5 per cent by February next year. On Wednesday, Federal Reserve chairwoman Janet Yellen said while the word "patient" had been removed from the bank's statement on monetary policy, indicating a possible increase in US interest rates, the bank would not be "impatient" – signalling the bank was not in a hurry to lift rates either. Mr Wood, known for his colourful forthright language, believes investors who expect interest rates to go up are backing the Fed's ability to normalise monetary policy. However, he is betting the United States will not be able to do this. "This is not going to be a normal cycle – there is nothing normal about it," he said. DIFFICULT POSITION In Australia, Mr Wood said, the drop in gross domestic product means the Reserve Bank of Australia needs to keep cutting interest rates, but it is caught in a difficult position. "The issue from Australia's central bank standpoint is that it doesn't want to cut http://www.afr.com/markets/marketdata/interestrates/clsaschristopherwoodsaysinterestratescoulddroptozero201503191m2trv 2/4 24/03/2015 CLSA's Christopher Wood says interest rates could drop to zero | afr.com interest rates because of the housing market which, from a value point of view, is overextended," he said. "You do have asset price rises driven by Chinese buying. But the bank is under pressure to cut rates, so I think it will have to come down to macroprudential controls and they are very political." Mr Wood, famed for telling investors in 2005 to sell out of subprime securities, is in Australia to meet with major fund manager clients. He expressed relief that on his yearly visit he found fund managers had changed their minds about where they saw interest rates heading. "When I was in Australia 15 months ago everyone thought that interest rates had bottomed and were going up. But now there is greater awareness among fund managers that it is going to stay lower for longer." Mr Wood also has bad news for the Australian dollar. He expects the local currency to be trading in the US60¢ to US70¢ range by this time next year. "The [Aussie] is still overvalued," he said. The star stock picker is underweight on Australia because of the structural changes in the economy following the fall-off in mining and resources activity. However, he is still reasonably happy with Australian banks. "The Australian banks are incredibly expensive but as long as they keep giving the dividend yield they will stay at that value," Mr Wood said. 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