When will interest rates rise from record lows? Financial market types have spent countless hours debating this question over the past year and a half, combing through statistics and carefully dissecting every utterance from the Reserve Bank.

But it appears we are no closer to the RBA pushing up borrowing costs anytime soon. As 2015 begins, most economists reckon rates are likely to stay at their record low of 2.5 per cent for several months more, and could even fall further.

When you look at the state of the economy, this may be surprising. Conditions are weak but not disastrous, and we are not in recession.

Australia’s economy has faced much more dramatic events in its history, such as the global financial crisis, the 1990s recession, and the 1970s oil-price shock. Rates never fell this low in these instances.

So why do interest rates need to remain this low now, and maybe even fall further? The answer is that the normal or “neutral” level for the official interest rate – the cash rate – has changed, perhaps permanently. That means that even when it ultimately rises, it is unlikely to go as high as in the past.

The neutral level is the point at which the cash rate doesn’t slow the economy, but neither does it stimulate growth by encouraging borrowing. Economists used to think it was about 5 per cent, but now Commonwealth Bank analysts say it is now 3 to 4 per cent.

So when economic growth returns to a more normal pace, which the Reserve Bank expects during the 2015-16 financial year, the cash rate won’t need to climb as high as it has in the past.

This is partly because the gap between the cash rate and the rates that banks actually charge their customers has widened, which means the cash rate needs to be lower to have the same effect.

When the cash rate climbed to its recent peak of 7.25 per cent in 2008, the economy was also experiencing historic booms in mining and in borrowing by households. These are unlikely to be repeated, so there may be less need for rates that are as high.

All up, it suggests interest rates will stay low for much of 2015, and maybe even fall further. When they do rise – and borrowers should always assume this will happen – they probably won’t rise sharply.

If the markets are right, the third of households with a mortgage can therefore expect their interest payments to remain unchanged, or even fall, over the first half of the year. For the far larger number of people with money in the bank, it suggests more disappointing returns on savings accounts.

Posted by Clancy Yeates – The Age on 14th January, 2015