You get the sense from economists that the global economy is in deep trouble, but nobody quite knows how to fix it.

For their part, major global investment banks are forecasting record-low interest rates as far as the eye can see.

“We’re living in extraordinary times at the moment,” Queensland Investment Corporation’s (QIC) Beverley Morris said.

It’s in keeping with the sentiment at a meeting of central bankers – including Australia’s Reserve Bank governor Philip Lowe – on the weekend in the US, where they struggled with ideas to sandbag the global economy from the escalating US-China trade war.

“What we’re seeing is markets and policy makers across the globe grappling with monetary policy towards the end of its useful life, but also unexpected and unexplainable political developments just make it so much more difficult for everyone,” she said.

There have been many gobsmacking moments on global financial markets this year, but a German auction of 30-year bonds captures the main market fear to a degree.

The government issued a bond that only offered to give investors their money back, and nothing more, in 30 years’ time.

Many big investors took up the offer.

Deutsche Bank’s chief economist said an auction of bonds at zero per cent interest was “just extraordinary”. Photo: Reuters/Luke MacGregor

Deutsche Bank Australia’s chief economist Phil O’Donoghue concedes he has never seen anything like it in his career.

“I mean, it’s just inconceivable to think that over 30 years we’re not going to see a positive rate of inflation,” he said.

“Implicitly, theoretically, that is what that 824 million euros (the amount of demand in the bond auction) is assuming.

“I mean, that is just extraordinary.”

There is a heavy focus on the ups and downs of interest rates of global long-term bonds because they are seen by economists as a throw-forward to what Australians can expect to pay on their interest rates years from now.

Global bank HSBC’s research team has forecast what the interest rate on a 10-year US Treasury bond will be in 2025.

HSBC Australia’s chief economist Paul Bloxham told PM that amazingly, it’s expected be lower than what it is today.

“If the rest of the world is going to have even lower interest rates, it’s very hard for Australia not to have to follow that path.

“And I think that’s what we’re looking at in terms of what’s going to drive the RBA to potentially have to cut further.”

Economists forecast interest rates to plunge further still. Source: HSBC Australia

What that means, Mr Bloxham said, is Australian interest rates are set to stay at record-low levels.

Or if the bank’s forecasts for the interest rate on the 10-year US government bond yield holds true, until at least 2025.

“What our team is suggesting is that actually we should expect that this is the state of the world that’s going to be around with us for quite some time yet,” he said.

“That global interest rates are going to stay low going forward for a number of years.”

HSBC’s note to clients suggests that longer-term real rates, which take inflation or rising prices into account, will be close to zero.

Up until recently, Westpac had led calls for the Reserve Bank to bring the cash rate down from 1 per cent where it sits today, to 0.5 per cent.

Now, Deutsche Bank says it expects the cash rate to drop to just a quarter of a percentage point by as early as the end of this year.

With the cash rate down to a fresh low of 1 per cent, Australia has entered what has been dubbed the “era of irrationality, impotence and inequality”. Photo: AAP

“Look it’s really hard I think to see upside here,” Mr O’Donoghue said.

“You know we are not going to go back to the kinds of interest rates we saw prior to 2008.”

Mr Lowe faced a Parliamentary hearing earlier in August.

Labor MP Andrew Leigh asked him what the Reserve Bank would consider looking at if the economy went further south.

He replied: “We are prepared to do unconventional things if the circumstances warranted it.”

But Mr O’Donoghue believes quantitative easing, where the Reserve Bank buys government and corporate bonds as a means of pumping money directly into the economy, is just a matter of time.

“At some point you are going to see the RBA adopting unconventional policy,” he said.

“Whether it’s this cycle or not, who knows?”

Mr Lowe said the Reserve Bank was prepared to do “unconventional things” if need be. Photo: AAP/Dan Himbrechts

So what does this all mean for borrowers and home owners?

“Certainly from the household perspective the expectation should be that interest rates are going to stay low for a persistent period of time,” Mr Bloxham said.

Ms Morris believes that reassurance is something Australian borrowers have never experienced before.

“It really is now telling people you do not have to worry about rates going up in the foreseeable future,” she said.

“And that guidance is obviously there to give that comfort to provide people with the incentive to go out and borrow and feel like they’re not going to be shocked by doing that.”

Ms Morris also thinks the interest rates on fixed-term loans aren’t going anywhere but down for years.

Earlier this month, the Bank of South Australia slashed its interest rates on a range of fixed rate mortgages to below 3 per cent.

The Bank of Melbourne and St George also made cuts of more than 1 per cent.

Bond market trading points to a US recession within two years, souring sentiment on global sharemarkets. Photo: Reuters/Simon Dawson

“Banks are themselves expecting that the cash rate is more likely to be going lower over the next three to five years, than higher, and that’s certainly the view that the bond market is expressing also,” Ms Morris said.

Hardest hit by these “extraordinary” times though are low wage earners who can’t bag a pay rise, and savers.

And as Ms Morris points out, there’s simply no end in sight to this economic funk.

“The reason why interest rates are going to be low, or lower still, is because of the economic backdrop,” she said.

“Not just in Australia but globally which, as the months have gone on this year, is starting to look a little bit worse.

“So you have to keep that in the back of your mind too, that’s it’s not a free ride in terms of interest rate cuts.

“The interest rate cuts are coming because of a softer economic backdrop.”

-ABC