Central banks can ensure low real interest rates until full employment, but not afterwards – Natixis

0

Central banks currently want to keep real interest rates very low to ensure borrower solvency, to support investment and to drive up the employment rate. However, population ageing is expected to lead to a decline in the savings rate and therefore to a rise in the real interest rate. Therefore, expansionary monetary policy can be sustained as long as full employment is not reached but not afterward, as per Natixis. 

Key quotes

“Central banks (we look at the OECD and the world) now want to keep real interest rates very low with various objectives: supporting investment; ensuring the solvency of governments and all borrowers; driving up the employment rate by maintaining an expansionary monetary policy while the unemployment rate is already very low.”

“Population ageing normally leads to a fall in the savings rate and if the savings rate falls, the real interest rate rises at equilibrium.”

“In the first stage, after a recession, there is underemployment. Expansionary monetary policy then leads to lower real interest rates. Low real interest rates lead to a rebound in investment, and the savings-investment equilibrium is ensured by the increase in GDP and income due to the expansionary monetary policy, which generates additional savings.”

“When full employment is reached, population ageing leads to a rise in real interest rates, as savings and investment need to be rebalanced to full employment with a fall in savings. The expansionary monetary policy can then no longer ensure low real interest rates and it drives up prices, both prices of goods and services and asset prices.”

Get the 5 most predictable currency pairs

About Author

Comments are closed.