Low interest rates are a dead-end street

Published on 2015/09/01

The markets’ have become just as hooked on low interest rates as a junkie craving their daily dose of heroin. The merest hint of withdrawal is enough to provoke anxiety.

For the markets to be plunged into turmoil, it needs some kind of external shock – whether the developing economic situation in China, or some other event. Whatever the trigger, the real root cause will be found elsewhere. It is revealing that market tensions eased at the exact same moment it was suggested that an interest rate rise in the United States, provisionally pencilled in for September, was being reconsidered, or at least put on ice for the time being. As soon as these “glad tidings” spread, all worries about China’s slowdown or the stock market crash in Shanghai evaporated – for the Dow, Dax & Co., the only way was up.

This is not the first time that fears of an interest rate hike have led to a slump, or that swift denials have caused shares to rebound. A reminder: In June 2013, the Fed’s then chairman, Ben Bernanke, signalled a shift in monetary policy and the markets descended into turmoil. It took interventions from numerous Fed spokespersons to qualify Bernanke’s statements and calm the markets. The interest rate hike was abandoned.

History is repeating itself: In the aftermath of the latest worldwide stock market falls, voices within the Fed have been raised to challenge the timing of any interest rate increases in September. Among market players, the certainty has quickly spread that interest rates won’t be touched. According to Bloomberg, traders and analysts now assess the chance of an interest rate hike next month as just 1 in 4. Some analysts expect rates to start going up from December, others don’t think we’ll see any changes until next year. And, if they were being totally honest, most hope that hell freezes over before rates go up. Even the ECB’s chief economist announced just a few days ago that the European Central Bank was ready to ratchet up its already sizeable and highly aggressive bond-buying programme if necessary. Another signal joyously greeted by Europe’s stock markets.

All that have really been exposed are the fatal consequences of low interest rate policies, something I have using this column to warn of from the very beginning: This is a dead-end street. There is no prospect of increasing rates in Europe. The impact on Italy, France, or any number of other European countries, would be close to catastrophic. Of course, interest rates will have to increase “at some point” – and rates in the USA will almost certainly have to go up before rates in Europe. Nevertheless, central banks are almost paralysed by fear at the prospect of increasing rates. They dread the massive stock market crash that will surely follow and are terrified that things can only end in another financial crisis (see my last commentary for more on this). No one will put it in these terms in public, but this is indeed the real reason for repeatedly postponing changes to interest rate policies.

Against this current backdrop, the fears among a number of real estate investors that interest rates in Europe will be raised anytime soon strike me as being totally irrational.

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