Legacy of the virus to warrant rock bottom interest rates for several years – CE

While some have speculated that the encouraging news about vaccines will prompt the major central banks to consider policy normalisation, or at least to stop loosening, economists at Capital Economics disagree. They expect  monetary policy to be loosened further in the coming months and will then remain ultra-loose for several years to come.

Key quotes

“While we hope that vaccines will allow activity to recover more rapidly next year, there is a very difficult period to get through in the meantime. It would be a mistake to remove support in anticipation of better times to come at a time when businesses are having to shut down and jobs are at risk. It is for this reason that we actually expect policy to be loosened further next month in the eurozone and perhaps also the US.”

“Evidence that banks have begun to tighten their lending criteria suggests that the case for monetary policy support is now even stronger than it was a few months ago. With many economies going back into lockdown, banks are likely to become even more cautious. We suspect that some central banks will make greater use of their lending programmes in the months ahead to ensure that credit continues to flow freely.”

“Our hopes about a vaccine have not led us to change our view that monetary policy will remain very loose for several years to come. Accordingly, the returns from government bonds are likely to be mediocre for years, while riskier assets are set to outperform.”