Wednesday, March 9, 2016

Near-zero rates for a very long time –


LONDON (Reuters) – International financial markets have certainly rebounded from the turmoil of the beginning of the year but growth and inflation scenarios integrated into many levels of asset prices suggest that the global economy is doomed to a prolonged stagnation and interest rates near zero for at least another decade.

the curves of interest rate swaps daily are instructive: they imply that the key rate of the European Central Bank (ECB) will not pass above 0.5% for 13 years and it will be difficult to cross the threshold of 1% for the next sixty years.

the situation is worse in Japan, where the key rate would remain, according to these curves at 0.5% for at least 30 years.

Even in the United States and Britain, the two largest and most advanced Western countries towards monetary normalization, the market for interest rate swaps on a daily basis does not allow consider a return of the rate to 1% by six years in the first case and ten years in the second.

“Although rates are low, they are not accommodating,” cautions Harvinder Sian, responsible strategy at Citi rate. “The era of zero rates will last for years and years, I would not be surprised if it lasts for five to ten years.”

Japan, the euro area but also Switzerland Denmark and Sweden are characterized by negative rates on bank deposits with the central bank, but also for the sovereign debt maturities to a minimum of five years in Denmark and up to 20 years in Switzerland .

Chart of the yield curve in Japan, Germany, Switzerland, Denmark and Sweden:


If market prices are sometimes considered unrealistic in a very ample liquidity environment, interest rate policy near or below zero also raised questions.

Yet they are still in force and 46 central banks eased monetary policy since early 2015, nine of them displaying key rate below 1%.

The ECB and the Bank of Japan, which adopted negative rates are preparing to further ease monetary policy is still more before going this route either by amplifying their asset purchase program.

If central banks of two of the major reserve currencies of the world soften their monetary policy, the result may be an appreciation of the other two – the sterling and the dollar – which reduces import prices and depressed exports to the United Kingdom and the United States, reducing the need for a tightening of monetary policy in both countries.

the long fight against deflation Japan is not encouraging. Faced with the consequences of the bursting of a real estate and stock market bubble, the Bank of Japan’s entry into the world of zero rates in the mid-1990s … and is still not out, despite an unemployment rate very and a low public debt ratio without equivalent.

“the current risks of durably low inflation installed switch to deflation (…) are at least as serious as the problem of inflation 70s They also require them changing paradigms of economic policy to be overcome, “wrote last week former US Secretary of State to the Treasury Larry Summers.

For most observers, Japan shows that a massive monetary stimulus by the central bank does not always allow to revive inflation or inflation expectations, domestic demand and eventually growth, a phenomenon known as the “liquidity trap”.

Joseph Gagnon, a researcher at the Peterson Institute for International Economics and a former economist with the Board of Governors of the Federal Reserve, all countries are not provided in the Japanese situation.

in the United States, core inflation and unemployment are close to the Fed’s goals.

But for him, “if Japan and the euro area does not soften them in a much more aggressive policy, they will remain stuck with zero or negative growth rates for years.”

(Marc Joanny for the french service, edited by Marc Angrand)


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