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Walking towards the age of low interest rates

Factors such as ageing and low productivity aggravate central banks ' difficulties in regulating monetary policy

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Walking towards the age of low interest rates

Central bankers appear before public opinion as all-powerful men and women capable of revolutionizing monetary policy with just a snap of fingers. Stanley Fischer, newly resigned vice-president of Federal Reserve (EDF) of United States, explained a year ago dangers of interest rates at historically low levels. And he was throwing a challenge to those who listened to him that day in new York. "Many of you will wonder: ' If you and your Fed colleagues don't like this situation, why don't guys just go up? '" Today I want to convince you that that is not so simple; And that some factors on which Federal reserve has little influence — such as technological innovation or demography — contribute to se low levels, "said Dosdel number of world's most powerful central bank."

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What Fischer was trying to explain is something that brings best heads of half-world economy to forefront. A phenomenon that has two questions rigged. Why is interest rate kept so low? And why is it so difficult for both Fed and European Central Bank (ECB) to boost inflation rates at least despite avalanche of extraordinary measures passed in recent years? These are two questions that could be summed up in one: do we walk towards a world of unusually low interest rates and inflation for an unusually long period?

The reasons for this paradigm shift are broad spectrum. Equilibrium interest rates, argueing diverse experts, tend towards minimal rates by factors such as progressive population ageing, low-hour productivity, or globalization. In this direction Jorge Sicilia, chief economist of BBVA, points out. "It is very possible that current low-rate phase has come to stay." This is explained by a population dynamic that has increased savings, very light increases in productivity that reduce investment or a contained inflation that poses no risks to price stability, says this expert. "If re is more saving and less investment in future, it is natural that re is a lower equilibrium interest rate," summarizes professor of economic analysis Joaquín Maudos.

The Mystery of inflation

Until recently, equation seemed simple: in times of bonanza, unemployment went downward and inflation upward. It's famous Phillips curve, which was never wrong. But formula seems to have lost its magic. Although unemployment rate in developed economies has gone from 9% to 6%, wages continue to grow at very low rates. And inflation is still missing. The usual tendencies in labor market seem to have broken. "Our framework for understanding dynamics of inflation might not be well defined in some key points," he said, in a burst of sincerity, Federal Reserve's own president, Janet Yellen, last month.

This explains striking statements, such as ECB's recent request to raise wages as a way to boost inflation, which until not long ago would have been anama to any central banker. Claudio Borio, of BIS, recommends for his part "patience" with low inflation "when this is due to supply-side factors such as globalization or technology." "Long periods of low inflation and good growth rates abound in history." This seems to be case today, he adds.

The bearish tendency of types will brighten families or companies that shuffle into debt in future. This week, ECB president Mario Draghi insisted on his idea that he will maintain price of money, now at 0%, over a prolonged period that will go well beyond 2018, year in which current. Mass purchase program is scheduled to conclude. A on part of Eurobanco.

Despite benefits of a lax monetary policy for European and American economy in recent years, some types at minimum levels can become a medium-and long-term problem for a number of reasons. At conference he gave in new York, Fischer grouped se reasons into three: low long-term interest rates send signal that growth prospects are weak, make economy more vulnerable to possible negative shocks, and finally , threaten stability of banks, which earn less money.

The challenges accrue to central bankers. The graduation of types no longer serves to cool or heat economy as before, considerably reducing its leeway. And ir traditional tools to boost inflation are also not working on one side of Atlantic.

Or risks

A few days ago, governor of a central bank of euro, which called for anonymity, admitted ECB's inability to grow inflation, and recommended to do, for now, ignoring Eurobanco's mandate to bring price level to 2%. "In this globalized world, low inflation is not biggest risk as long as central banks remain alert and act if necessary." It has been shown that for se banks it is easier to reduce inflation than to drive it, ' synsizes in a telephone conversation Claudio Borio, head of Monetary and economic Department of International Bank of Payments (BIS).

The narrow leeway of central banks will become more apparent if current interest rates at minimum levels are perpetuated over time. Because in face of emergence of new crises, mechanisms of a ECB that has maintained price of money below 2% will be reduced. "It is not just that process of exiting current extraordinary measures will be very slow and gradual, but that when in future it wants to implement an expansive monetary policy, it must resort to non-quantitative measures," concludes chief economist of Bbva. In Román Paladino: that ECB will be forced again to implement extraordinary measures to deal with future crises.

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