Should Central Banks Keep the Waning 'Low Interest Rates'... Deliberating Continuously

Economic Growth Rate Stagnates, Only Real Estate Prices Soar... Increasing Dissatisfaction with Low-Interest Policy
Risks Abound from US-China Trade Dispute, Middle East Uncertainty... Difficult to Adjust Interest Rates

[Image source=European Central Bank (ECB) website/www.ecb.europa.eu]

[Asia Economy Reporter Hyunwoo Lee] Among global central banks continuing ultra-low interest rate policies, doubts about the effectiveness of low interest rates are growing. While economic growth rates remain stagnant, the liquidity released into the market has instead significantly driven up real estate prices, putting pressure on the everyday economy. However, there are also considerable concerns that raising interest rates could increase the risk of an economic recession, leading to deep deliberation.

According to Bloomberg News and others, the European Central Bank (ECB) prepared a massive 336-page report for its first monetary policy meeting of the year held on the 22nd (local time). This was in response to ECB President Christine Lagarde’s directive at last month’s meeting to "review the entire monetary policy." The ECB’s benchmark interest rate has remained in the 0% range for nearly four years since March 2016, and this was an order to seriously discuss ways to break away from the low interest rate stance.

Concerns about low interest rate policies have also emerged in monetary policy meetings in Japan and the United States. At the Bank of Japan (BOJ) monetary policy meeting held on the 21st, BOJ Governor Haruhito Kuroda said, "It is true that we must keep in mind the adverse effects that prolonged ultra-low interest rate policies may have on the overall financial system, but for now, the benefits outweigh the costs." The minutes of last month’s Federal Open Market Committee (FOMC) meeting of the U.S. Federal Reserve (Fed) also mentioned that "some participants expressed concern that maintaining low interest rates for a long period could encourage excessive risk-taking and trigger imbalances in the financial sector."

The biggest side effect of low interest rates pointed out by central banks worldwide is that rather than contributing to economic growth, they drive up real estate prices, increasing the burden of housing costs. Last year, except for the United States, major advanced economies’ growth rates remained in the low 1% range, leading to disappointment and skepticism about ultra-low interest rate policies. According to the International Monetary Fund (IMF) data on last year’s GDP growth rates of major countries, the Eurozone (19 countries using the euro) averaged 1.2%, and Japan was at 1.0%.

Liquidity released through low interest rates flowed into housing. The IMF’s Global House Price Index, which indexes the average real house prices of 63 countries worldwide using the first quarter of 2000 as a baseline, surged to 165.1 in the first quarter of last year. The index was 159.4 just before the global financial crisis in the first quarter of 2008 when real estate prices peaked. Particularly, Sweden’s house price index rose to 243.37. Amid a real estate speculation boom, Sweden’s household debt-to-GDP ratio soared to 87.8%. Ultimately, Sweden’s central bank, the Riksbank, abandoned its negative interest rate policy last month by raising the benchmark rate from -0.25% to 0%.

Central banks find it difficult to easily abandon low interest rate policies due to fears of the aftershocks that rate hikes could bring. With ongoing issues such as the U.S.-China trade dispute, Middle East geopolitical uncertainties, and concerns about economic slowdown, raising interest rates is judged to cause significant shocks to the economy. The IMF pointed out in its "2020 World Economic Outlook" report presented at the World Economic Forum (WEF) that "although the U.S.-China trade dispute has eased, there are concerns about another trade tension between the U.S. and Europe," and "major advanced economies’ interest rates are at or near zero or negative, weakening monetary policy effectiveness."

Jung Kyu-chul, a research fellow at the Korea Development Institute (KDI), said, "If the economy, which has just started to recover after the financial crisis, slows down again, an irreversible situation could arise. Therefore, if monetary policy capacity is exhausted, fiscal policy should be used to prevent economic slowdown."