It is time for a total rethink on the direction of monetary policy, not just in the UK but worldwide. After over seven years of record low interest rates, there is little sign of a return to more normal monetary policies.
That helps to explain why the yield on US Treasury bonds has held up when the return on government bonds has collapsed in the UK and the euro area. Investors may now conclude that if central banks are prepared to exchange government bonds for money so readily, why should the bonds they buy earn any sort of premium over cash — which has a zero return?
There will be serious long-term consequences for our economy if this does not happen soon. Long-term bond yields are not just low by recent standards. Current policies are discouraging long-term saving and businesses are being forced to divert resources away from productive investment to support ailing pension funds.
The previous low-point for UK government long-term bond yields was at the end of Low interest rate and the deutsche 19th century when they dropped to just below 2pc. That is no longer the case. This has led a prolonged period of extremely low official interest rates, and large purchases of government bonds by central banks.
Until recently, it was possible for long-term investors to earn better returns and protect themselves against inflation by investing in government bonds.
The level of interest rates and associated policies like QE are still geared to help those who want to borrow — whether they are individuals, companies or governments.
The obvious explanation is the very stimulatory monetary policies pursued around the world since They are still preoccupied with short-term fire-fighting. Ina year UK government bond was still offering an annual yield of 4pc, significantly above the 2pc inflation target.
We can see this in the financial health of UK pensions funds, which are heavy investors in government bonds. But from the perspective of long-term investors like pension funds and insurance companies we are already in a world of negative returns.
Save Save Since the financial crisis, we have become used to living in a world of low interest rates. Record low government bond yields are signalling an important message: They are the lowest returns we have seen in the UK since the Bank of England was founded in What is the way out of this impasse?
Mark Carney has said he does not envisage the Bank of England setting a negative interest rate. Quantitative Easing QE is also acting as a persistent and prolonged dampener on long-term yields. Mark Carney Long-term investors can no longer protect themselves against inflation by buying government bonds.
The long-term average return on UK government bonds since the s has been around 4. If it becomes clear that the latest rate cut and QE injections were unnecessary, they should be reversed.
We need a much longer-term strategy from governments and the central banking community to rebalance economic policies — with more emphasis on supply-side reforms and business-friendly fiscal policies to support growth.
Central banks have stepped in to create an artificial demand by buying up vast quantities of government bonds, depressing returns. Both of these policies depress government bond yields. If inflation returns to the 2pc target, as expected, these returns are negative in real terms.
Ten-year UK government bonds now offer a cash return of just 0. At a time when we should be developing policies to help deal with an ageing population, monetary policy is creating incentives in totally the wrong direction. First, we must stop digging and making the financial hole any bigger.
What would negative interest rates mean for your savings? When ultra-low interest rates and QE were first deployed in the UK and other major economies inthey were seen as temporary policies to dig us out of the hole created by the financial crisis.
The markets have concluded that for now there is little prospect of a change in this approach, with the possible exception of a slow and gradual rise in US interest rates.Oct 04, · The low- zero- and negative-interest rate policies pursued by the Federal Reserve and many of the world’s other central banks are based on the assumption that low interest rates stimulate.
European bank stocks came under intense pressure on Wednesday amid continued investor concern about low interest rates, with both Deutsche Bank shares and the Euro Stoxx banks index hitting record.
low interest rate and the Deutsche Bank Words | 37 Pages analysis of the effect of protracted low interest rate on Date Course Advanced Finance, Banking & Insurance LecturerProf. Apr 26, · The Era of Very Low Inflation and Interest Rates May Be Near an End. Moves in global bond markets over the last few months suggest changing expectations about prices.
S ince the financial crisis, we have become used to living in a world of low interest rates. The official Bank of England interest rate was cut to pc over seven years. Hence, when market interest rates fall, banks’ funding costs usually fall more quickly than their interest income, and net interest margins rise.
Over time, however, net interest margins fall as loans are repaid or renewed at lower interest rates.Download