05.06.2014
Low interest rates

Structural Reforms instead of further Monetary Easing

In light of the ECB’s ongoing expansive monetary policy, the Cologne Institute for Economic Research (IW) argues in favor for a smooth interest rate turnaround starting in mid-2015.

Until recently, monetary policy was loosened further in the Euro zone by cutting policy rates as well as adopting new unconventional measures. However, the ongoing monetary easing hasn’t shown significant stimulating effects, while at the same time risks are increasing. There are yet a number of economists who are calling for a raise in interest rates soon. An IW study commissioned by the German Insurance Association (GDV) analyses the overall economic framework and recommends a smooth interest rate turnaround in mid-2015.


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Aside from the risks posed by the low interest rate environment, the trend towards economic recovery in the Euro zone supports this course of action, in the authors’ estimation. They note that structural reforms in the countries affected by the crisis have borne fruit and the stabilization of the banking sector is making tangible progress, concluding that fears of deflation are unfounded. If the macroeconomic environment normalizes, the ECB will soon be able to switch from crisis mode to normal mode” said IW Director Michael Hüther.

GDV President Alexander Erdland stated that, in managing the crisis, the ECB has done its part in getting the sovereign debt crisis in the Euro zone under control, but that the side effects of this expansive monetary policy will only increase as long as those measures remain in effect. Old-age pension savings in particular have suffered from the fact that interest rates have remained low for years.

In its study, the Institute proposes raising interest rates in very small increments at first, “with a sense of proportion,” since raising interest rates too quickly might create an undesirable burden for the economy. The study also states that the capital markets need to be prepared for the interest rate hikes in a timely manner in order to avoid uncertainty with respect to the future course of monetary policy.

The Institute’s study, “The current low interest rate environment: causes, effects and exit strategies,” was published in early June 2014 as part of a round table titled “Time to raise interest rates.” The study’s findings are based on an extensive analysis of the economic situation in May 2014.

IW Köln
The current low interest rate environment: causes, effects and exit strategies
Study on behalf of the German Insurance Association (GDV)

 

Contact:
Christian Ponzel
Phone: (+49) 30 / 2020 – 5186
Mail: c.ponzel@gdv.de