The world of zero
interest rates has outlived its usefulness, according to a chorus of
influential bankers, watchdogs and economists anxious about asset
bubbles and wealth inequality.
As
financial markets start bracing for the first U.S. and British interest
rate rises in almost a decade, there's a pervasive feeling that the
extraordinary central bank policies of near zero percent borrowing
rates, money printing and bond buying are now causing more problems than
they're worth.
Few, if any, now doubt super-easy credit and quantitative easing, for all their spillovers and distortions, were the right medicine to nurse economies out of a systemic banking shock, credit crunch and deflation scare.
But even those who applauded the rescue feel the cure has largely done its job and is now merely spreading other maladies.
"It's a mistake to keep interest rates this low for so long as it breeds complacency and leads to social inequality," a top UK bank executive told Reuters. "QE was the right thing to do but I'm not comfortable with interest rates at zero."
That view is echoed across many central banking and supervisory circles too, where there's some anxiety that inflation-targetting central banks have been overly mechanistic in prolonging very low interest rates due to a brief oil-led scare on headline deflation late last year.
Markets too are antsy about lofty and QE-fueled financial prices and many are fearful recent tremors in both "safe" AAA debt markets and equity indices are a reminder of unnervingly positive correlations between bonds and stocks in recent months, even though they should typically act as hedges for each other.
And the absence of an obvious haven in a world of pricey assets is another easy money conundrum that argues for its end. "Classic safe haven plays may not be as safe as advertised," said Blackrock chief strategist Russ Koesterich.
"If you’re trying to stabilize markets and if you’re worried about extreme macro risks, then QE works quite well," said PIMCO's fixed income chief investment officer Andrew Balls. But "if you’re trying to fine tune growth and inflation outcomes then the evidence is that QE is a pretty blunt instrument."
Even European Central Bank chief Mario Draghi, who came late to full-blown QE policies this year, acknowledged last week that a volatile surge in what had been near-zero 10-year German government bond yields was something investors just needed to get used to -- signaling that even ongoing ECB QE would not simply underwrite bonds at their peaks.
Few, if any, now doubt super-easy credit and quantitative easing, for all their spillovers and distortions, were the right medicine to nurse economies out of a systemic banking shock, credit crunch and deflation scare.
But even those who applauded the rescue feel the cure has largely done its job and is now merely spreading other maladies."It's a mistake to keep interest rates this low for so long as it breeds complacency and leads to social inequality," a top UK bank executive told Reuters. "QE was the right thing to do but I'm not comfortable with interest rates at zero."
That view is echoed across many central banking and supervisory circles too, where there's some anxiety that inflation-targetting central banks have been overly mechanistic in prolonging very low interest rates due to a brief oil-led scare on headline deflation late last year.
Markets too are antsy about lofty and QE-fueled financial prices and many are fearful recent tremors in both "safe" AAA debt markets and equity indices are a reminder of unnervingly positive correlations between bonds and stocks in recent months, even though they should typically act as hedges for each other.
And the absence of an obvious haven in a world of pricey assets is another easy money conundrum that argues for its end. "Classic safe haven plays may not be as safe as advertised," said Blackrock chief strategist Russ Koesterich.
"If you’re trying to stabilize markets and if you’re worried about extreme macro risks, then QE works quite well," said PIMCO's fixed income chief investment officer Andrew Balls. But "if you’re trying to fine tune growth and inflation outcomes then the evidence is that QE is a pretty blunt instrument."
Even European Central Bank chief Mario Draghi, who came late to full-blown QE policies this year, acknowledged last week that a volatile surge in what had been near-zero 10-year German government bond yields was something investors just needed to get used to -- signaling that even ongoing ECB QE would not simply underwrite bonds at their peaks.
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