Based on the latest ATO numbers to 31 March 2021, SMSFs are still holding 19.8% of their assets in cash and term deposits – despite record low interest rates and negligible returns. It’s true this percentage of total assets has fallen from 26.7% at 31 March 2016, but at 19.8% it remains a healthy portion of their investment portfolios.

For these SMSFS – it’s fair to assume most hold a percentage of cash and term deposits – there seemed to be a glimmer of hope recently that the Reserve Bank might start increasing the official cash rate. Nothing dramatic, but a cash rate that now sits at 0.1% after beginning its downward spiral in November 2011 when 25 basis points were shaved off it to take it to 4.5%, might begin retracing its steps.

Those hopes were based on both local and international factors. Globally, the economic recovery has been surprising in its strength considering the COVID-19 pandemic is still very much part of our lives. It has resulted in rising sovereign bond yields as the markets expect economic growth and inflation to accelerate in the coming months.

It’s not just a US phenomenon. The UK bond yield is also steepening as a response to the fast vaccination rollout and a central bank that wants to encourage economic growth, as are other developed economies.

In Australia, a strong property market has been another factor that prompted some analysts to suggest the Reserve Bank might lift the cash rate from 0.1% sooner rather than later. But those suggestions were put to bed in early May when the Reserve Bank’s Deputy Governor Guy Debelle said it would not raise interest rates to ease soaring house prices because tightening monetary policy could cost jobs with the Bank’s focus being squarely on reducing unemployment, supporting conditions for sustained economic growth and encouraging inflation back into the target range.

In a speech that articulated Reserve Bank thinking on rising housing prices – in the January-March quarter Sydney house prices rose 8.5% – Debelle said: “Lower interest rates had boosted borrowings and the cash flow of existing borrowers, as well as putting downward pressure on the Australian dollar. In addition, rising house prices encourage home building, along with government grants such as the homebuilder policy, which boosts activity and employment.

“The bank recognises that rising housing prices heighten concerns in parts of the community. Housing price rises can have distributional consequences. That is certainly an issue that needs to be considered, and there are several tools that can be used to address the issue. But I do not think that monetary policy is one of the tools.”

If analysts predicting higher interest rates in the near term before Debelle’s address were a minority, their number has shrunk even further since then. Late next year is the earliest most analysts are now prepared to tip an interest rate rise. The RBA Governor Phillip Lowe reinforced this after the July Board meeting when he said conditions would not be met for a rate increase until 2024.

Historically, steepening yield curves heralded economic growth and inflationary pressures – with central bank intervention in the form of higher interest rates almost inevitably following. But today we have this economic scenario – especially strong economic growth – yet the latest Bloomberg poll of central banks found the vast majority intend to maintain their ultra-easy monetary policies in 2021. In a survey that covered 90% of the world economy, no major Western central bank is expected to lift interest rates this year, and only two countries, Argentina and Nigeria, forecast rate rises, while China, India, Russia and Mexico are among those predicted to cut their benchmarks.

So, the question to pose is this: has the nexus between economic growth and monetary policy been broken, with the global economy now experiencing “secular stagnation”. This theory, first postulated in 1938 by Harvard economist Alvin Hansen in response to The Great Depression, was discarded in the wake of the World War II military spend and the post-war recovery.

But former US Treasury Secretary Larry Summers put secular stagnation back on the agenda in a 2013 speech to the IMF when he argued that it may have become all but impossible to boost growth by using the age-old trick of lowering interest rates to encourage more investment and consumer spending. In Summers’ words, “secular stagnation may be the defining macroeconomic challenge of our times”.

Like all economic theories, it’s been contested. Interest rates did rise during the presidency of Donald Trump and the economic impact of COVID is still playing out. But the fact remains real interest rates remain negative in many advanced economies, and those that subscribe to Summers’ theory believe the rate required to stimulate economies is so far into negative territory to render it effectively impossible. In others, monetary policy has largely lost its economic clout.

In 1938, it all seemed so plausible. Just as it does today. Let’s just hope we don’t need a world war to put this theory to rest again. In the meantime, for SMSF trustees awaiting a rise in interest rates, it could still be some time away.