Note: This article is courtesy of Iris.xyz
By Bill Acheson
Remember the phrase “lower for longer” that the market used to use to describe the outlook for US interest rates? In a post-Brexit world, “lower forever” seems more appropriate. The continued, and possible permanent, low interest rate environment worldwide holds significant consequences for investors. And also for investment advisors who want to avoid a “Clexit,” that is, a client exit.
Interest Rate Policies and Low Interest Rates
How did we get here? The answer that many people will give to this question is monetary policy – meaning that central banks around the world, through their interest rate policies, are responsible for low interest rates. While this is accurate on the surface, the reasons central banks need to lower interest rates in the first place reveal the true answers:
1) The Great Recession. The great recession is the single largest contributor to continued low interest rates, although by no means the only factor. The collapse in credit associated with the great recession destroyed all kinds of growth: asset prices (think real estate), economic output (think company earnings) and, of course, employment. These outcomes are all very deflationary, and the monetary policy response to deflation is to lower interest rates to stimulate credit and economic growth. Central banks around the world – including the United States – are still fighting deflationary forces unleashed by the great recession.