Is monetary policy exhausted?


Jonathan Platt, Head of Fixed Income

1 June 2016

In recent months some central banks, including the ECB and the Bank of Japan, have moved interest rates into negative territory in an effort to combat persistently low inflation expectations.

While there is some evidence to suggest that the ECB’s actions have helped contain the slowdown in the eurozone economy, economic growth remains very low.

Even in countries where growth has been stronger, such as the US, it likely that the next economic downturn would result in interest rates being cut from their very low plateau. While monetary policy has certainly been stretched, with interest rates sinking towards record lows, we think that there is still scope for more radical measures, for example extended versions of the ECB’s Long Term Refinancing Operations, to be used if deflation really becomes a likelihood.

We are, however, more confident in economic growth and less concerned about deflationary pressures, and thus we expect that both the US and the UK will tighten monetary policy in the year ahead.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.