IMF Warns Negative Effects of Continued Low Interest Rates

A prolonged period of low interest rates will tempt banks to take greater risks and sound the death knell for final salary pensions, the International Monetary Fund has warned.

A new study from the IMF said a continuation of the cheap borrowing environment seen since the global financial crisis a decade ago would pose a “significant challenge” to financial institutions and force them to make fundamental changes to their business models.

Although interest rates have recently started to rise in the United States, the IMF said Japan’s experience suggested an imminent and permanent end to the current low interest rate environment could not be guaranteed. Some economists, such as the former US treasury secretary Larry Summers, say the global economy is gripped by so-called secular stagnation, in which excessive savings and weak investment lead to weaker growth and lower interest rates.

The IMF, in a chapter from its forthcoming Global Financial Stability Review, said the decline in real (inflation-adjusted) interest rates since the mid-1980s had been caused by slow-moving structural factors such as weaker growth and the desire of an ageing population to save more for their retirement.

It was possible that the pace of innovation had slowed, while rising savings and an appetite for advanced-country financial assets in emerging nations had also put downward pressure on interest rates in the west over the past 15 years.

Japan has had ultra-low interest rates for almost three decades, while other developed countries cut borrowing costs aggressively in response to the deep financial and economic crisis that began almost a decade ago.

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza