3 May 2016
Central Banks: Ultra-low/negative interest rates failing to achieve growth - Rabobank
Michael Every, Head of Financial Markets Research at Rabobank, suggests that the ultra-low/negative interest rates appear to be failing to achieve their primary goal – to boost productive borrowing and hence growth– and have lots of worrying side effects that get worse as rates continue to decline, and which will only get worse over time.
Key Quotes
“Central banks therefore look to be running out of useful tools in their policy toolkit even if they don’t want to admit that they are.
On one hand, this means while such policies are still used, financial markets will continue to move further into ‘bizarre’ trading territory, with risks of a wrenching correction likely if monetary policy is ever normalized.
Worse, as their ultimate lack of success becomes clearer markets may start asking ‘Qui custodiet ipsos custodes?’ (Who watches the watchmen?) That is to say, what will happen if markets lose faith in central banks entirely? Against that backdrop, can current asset valuations be maintained? That may only be a tail risk for now, but it’s clearly another area in which we are on very thin ice. In other words, having already established the world economy is on thin ice, we have hopefully now also convinced you that central banks are as much a part of the problem as they are the solution.
Regardless, most people’s base-case scenario, including ours, is that we will somehow manage to muddle through and find thicker ice to stand on over time.”
Key Quotes
“Central banks therefore look to be running out of useful tools in their policy toolkit even if they don’t want to admit that they are.
On one hand, this means while such policies are still used, financial markets will continue to move further into ‘bizarre’ trading territory, with risks of a wrenching correction likely if monetary policy is ever normalized.
Worse, as their ultimate lack of success becomes clearer markets may start asking ‘Qui custodiet ipsos custodes?’ (Who watches the watchmen?) That is to say, what will happen if markets lose faith in central banks entirely? Against that backdrop, can current asset valuations be maintained? That may only be a tail risk for now, but it’s clearly another area in which we are on very thin ice. In other words, having already established the world economy is on thin ice, we have hopefully now also convinced you that central banks are as much a part of the problem as they are the solution.
Regardless, most people’s base-case scenario, including ours, is that we will somehow manage to muddle through and find thicker ice to stand on over time.”