Touted as a central bank emergency response tool, negative interest rates across much of the developed world are becoming an entrenched norm. Even before the coronavirus pandemic paralysed economies and sent markets into a tailspin, interest rates in Japan and much of Europe were below zero and negative yields had enveloped a quarter of the global bond market.
Since March 2020, central bank rates have been negative in either nominal or real terms across the Group of Seven leading economies: Canada, France, Germany, Italy, Japan, the UK and the US.
This report examines the impact of ultra-low rates on portfolio allocation, the changing economic backdrop and the risks and opportunities for investors in a world where monetary stimulus is being pushed to its limits.
Our thanks are due to the following interviewees for their time and insights:
- Ruchir Agarwal, economist and low-interest-rate specialist, IMF
- Charles Bean, professor of economics, London School of Economics
- Tom Carr, head of private debt, Preqin
- Aswath Damodaran, professor of finance, New York University
- James Davis, chief investment officer, OPTrust
- Andrew Milligan, independent investment consultant
- Noorsurainah Tengah, head of absolute return and commodities, Brunei Investment Agency
For the second time in little more than a decade, policymakers around the world have been forced to take extreme measures to avert a global economic collapse. The coronavirus outbreak has shut down swathes of international commerce, put entire countries in lockdown and left governments—even those ideologically opposed to state interference—propping up private industry.
Just as after the financial crisis of 2008, central banks slashed policy rates and printed money to fund asset-buying sprees. The aim is to lower market interest rates, making it easier for companies and governments to borrow.
The power of central banks to move markets is undisputed but their power to revive economies has never been more in doubt. Central banks’ willingness to flood markets with cash and buy corporate as well as government debt has fuelled an astonishing rebound in risk assets. But for how long can asset prices decouple from economic growth? And what are the long-term implications for the financial system?
To examine these dynamics, this report draws upon extensive desk research and in-depth interviews with practitioners in the field. The key takeaways are as follows:
- Quantitative easing has unintended side effects
- Interest rates to stay lower for longer
- Valuations are harder to interpret
- Alternative assets face coming-of-age test
- Influence of fiscal policy mounting
- Favouring asset holders
- Central bank rescues favour risk-takers
