Business Essentials for Professionals


Since Lehman Brothers, Central Banks have Cut Interest Rates 690 Times

Since Lehman Brothers, Central Banks have Cut Interest Rates 690 Times
According to data from JP Morgan Asset Management, since the collapse of Lehman Brothers in September 2008, the top 50 central banks around the world have seen a total of 690 interest rate cuts.
Analysts have warned that central banks may start to run out of ammunition soon while this number means one rate cut every three trading days.
"Essentially these rate cuts came into effect to try and stimulate economic growth and to prop up economies post the financial crisis," Alex Dryden, global market strategist at JP Morgan Asset Management, said. But he warned that central banks are running out of room to maneuver.
"The Bank of Japan, for example, own over 45 percent of the government bond market, over 65 percent of the domestic ETF market and are a top 10 shareholder in 90 percent of listed firms. They have also cut rates into negative territory. There isn't much more they can do."
The question of whether the world's central banks use the bond-buying programs known as quantitative easing (QE) or conventional ways such as lowering interest rates to stimulate borrowing for pumping in more and more cash into the economy is tormenting the markets which continue to ride the wave of uncertainty and speculation over the issue.
There are other areas of the economy that could see a knock-on effect as we delve deeper into this world of ultra-low interest rate and easy monetary policy. This raises a very big question – will the global economy ever exit this low interest rate environment?
"No easy way out. The world has changed and the level of neutral interest rates has fallen for most countries," Jan von Gerich, chief economist at Nordea, said.
Gerich further explained that monetary policy considerations were made harder for central bankers by the fact that the way inflation is responding to growth seems to have changed.
"The situation varies a lot, though. The Fed is gradually finding at least a partial way out while it is hard to see the European Central Bank (ECB) raising rates before the next recession arrives."
The banking sector has not yet recovered from the shock of eight years ago when the U.S. banking giant Lehman Brothers filed for bankruptcy and send shockwaves across the global financial markets.
The falling interest rates have added further pressure on bank's profitability even while the easy monetary policies from central banks helped bring stability in the economy. Added to this is the growing uncertainty around geopolitical events such as the U.S. elections that saw Donald Trump's elected President and U.K.'s vote to leave the European Union.
But will we ever go back to a pre-Lehman era?
"Given the current climate, no. Monetary policy has been over utilized and over stretched over the last few years and a failure by the government to employ responsible fiscal policy to complement central bank policy has led us into an era of cheap credit, low rates but proportionally inadequate growth," Anasakti Thaker, market economist at PhillipCapital UK, said
"Given the uncertainty the likes of (Donald) Trump and Brexit bring, both the U.K. and U.S. are unlikely to revert back to pre-Lehman policy and instead will use interest rates to manage inflation risks and provide assurance to nervous markets and consumers."

Christopher J. Mitchell

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