Quay Global Investors principal and portfolio manager Chris Bedingfield said the use of low interest rates to stimulate inflation and bolster an economic recovery is proving ineffective.
“The main stimulus from low interest rates is an increase in demand for loans, which are then used to acquire assets or goods and services. It is the newly created money that is the stimulus,” he said.
“At very high levels of private debt, however, these lower interest rates begin to lose their effectiveness.”
In terms of inflation, Quay pointed out that in Sweden, with an interest rate of -0.35 per cent, inflation still sits at +0.1 per cent. This is short of the central bank’s 2.0 per cent inflation target. Further, after almost 20 years of near zero interest rates, Japan continues to live with low inflation rates.
Mr Bedingfield argued that the long-term impact of quantitative easing (QE) is yet to be seen, and could have “significant” consequences.
He said there is a risk that confidence in central banks will be lost, resulting in market disruption.
“Central banks are running out of ammunition, outside of the placebo effect of being seen to do something. But the positive effects of a placebo do not last forever.
“It is really only a matter of time before markets accept the true limitations for monetary policy,” Mr Bedingfield said.
Quay added that QE has had very limited transmission benefits. Providing more money to the banking system does not guarantee more money to the economy. To date, according to the investment firm, European style QE has “failed” to deliver the economic boost needed for an employment recovery.
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