The BIS seems to be at odds with the IMF concerning monetary policy. The latest outlook piece from the BIS both argue that continued policies of keeping rates near zero will have a detrimental effect on the global economy. Lending at low rates creates more risk taking behavior. This was one of the causes of the last asset bubble in housing. There is a cost with forcing rates to low levels and allowing investors to have almost free money.
The IMF is taking an alternative view of arguing for continued monetary easing.With inflation close to zero, the real rate of interest in many developed countries are not overly stimulative. hence, there is a need to keep rates low in an attempt to stop a deflation spiral. While there may be a cost with low rates, lending at near zero will have the effect of increasing consumption and investment today as opposed to waiting. The need for monetary stimulus is all the greater fiscal stimulus is starting to weaken.
The battle is on. Clearly, low rates in the G3 will have an effect on interest rates around the world. Consequently, price sin the rest of the world may rise even if there is low inflation in the G3. We are already seeing this happen when we look at the inflation difference between the G3 and emerging markets.
The low rate problem will be an issue for any government that is now tracking systemic risk issues. An economy can have asset price inflation even while traditional prices are stable. We have seen that in housing.
While we are in the nervous BIS camp, we still believe there is a need for monetary stimulus and low rates. The near-term harm is low, so we will ride the rate wave until we get a change in sentiment.
The IMF is taking an alternative view of arguing for continued monetary easing.With inflation close to zero, the real rate of interest in many developed countries are not overly stimulative. hence, there is a need to keep rates low in an attempt to stop a deflation spiral. While there may be a cost with low rates, lending at near zero will have the effect of increasing consumption and investment today as opposed to waiting. The need for monetary stimulus is all the greater fiscal stimulus is starting to weaken.
The battle is on. Clearly, low rates in the G3 will have an effect on interest rates around the world. Consequently, price sin the rest of the world may rise even if there is low inflation in the G3. We are already seeing this happen when we look at the inflation difference between the G3 and emerging markets.
The low rate problem will be an issue for any government that is now tracking systemic risk issues. An economy can have asset price inflation even while traditional prices are stable. We have seen that in housing.
While we are in the nervous BIS camp, we still believe there is a need for monetary stimulus and low rates. The near-term harm is low, so we will ride the rate wave until we get a change in sentiment.
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