Bond markets

„Avoiding skyrocketing interest rates“

GDV president Dr Alexander Erdland talks about deflation risks that haven’t materialised, a potential overheating of the US economy and the limits of the ECB’s monetary policy.

Mr Erdland, bond yields have fallen to unprecedented levels in recent years, but for a few months now, they have been rising again. In March, the US central bank decided to raise rates. Do you think this is a flash in the pan or a true change in interest rate policy?
Alexander Erdland: There are indeed reasons for a true change in interest rate policy. The recovery from one of the most severe financial crises in modern economic history is progressing and the Fed ending its zero-rate policy plays a crucial role. Even though many issues such as high public debt levels have not been resolved yet, there are more and more signs that the economic momentum in Western developed countries has picked up. This is especially true of the United States, but also of the eurozone. And, by the way, higher US interest rates still translate into higher Bund yields. The current rate rise is a case in point. Inflation expectations are clearly on the rise again, too. Deflation risks, if they have ever existed to a significant extent, are gone. ECB president Mario Draghi confirmed as much during one of his latest press conferences.

Alexander Erdland is president of the German Insurance Association (GDV)

„Deflation risks, if they have ever existed to a significant extent, are gone.“



What is the risk of abruptly rising interest rates, in your opinion?
Erdland: Currently the risks of abruptly rising rates are low, because the high degree of political uncertainty is keeping global growth down – and with it real interest rates. In addition, the underlying price pressure across the eurozone is still low; core inflation was slightly below 1% until recently. Besides, further rate rises by the US Federal Reserve should be largely priced in by now. However, both the Fed and the ECB will need to be careful not to appear to be acting too slowly and fall behind. This could happen if the US economy overheats in the wake of fiscal stimuli, such as the tax cuts promised by President Trump. In that case, if central banks did “too little, too late”, inflation expectations would shoot up. And then there would indeed be the risk of interest rates skyrocketing, which in turn could cause considerable turmoil in the real economy and in the financial markets. For the sake of stability it is imperative to avoid that.

Is what we are currently witnessing the beginning of the end of the ECB’s post-crisis monetary policy?
Erdland: It is not for nothing that organisations such as the Bank for International Settlements or the German Council of Economic Experts in recent months have pointed out time and again that the regime of ultra-low interest rates has become one of the largest stability risks; we as insurers share that assessment. The US Fed has accelerated its change of course. If the ECB doesn’t want to fall behind in the eyes of the markets, it will need to prepare investors for the end of its ultra-accommodative monetary policy as soon as possible.


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