The End of Austerity?

“Monetary policy has done as much as it really can and it needs to be complemented by fiscal policy and structural reforms,”

– Catherine Mann, chief economist at OECD

A new investment paradigm?

We’re living in a year of extremes. Record high equity prices, record low oil prices, record low inflation levels, and even record low Olympic swimming times. But the biggest extreme is effectively the extent to which central banks have pushed their monetary policies, stretching their policy tools to the limits, setting record low interest rate levels and purchasing record amounts of financial assets. Activist monetary policy has become so entrenched in investors’ minds that some now believe we’re moving to a new investment paradigm, grounded in zero interest rates, very low real rates of return, and near-zero inflation levels, which appear to be here to stay for the foreseeable future.

For the last 30 years, central banks have been very effective at keeping inflation levels under their radar whilst leading interest rates to single digits. The independence of central banks from governments and the move from “monetary targeting” towards “inflation targeting” allowed central banks to increase their effectiveness. But during the last few years, we have also witnessed a progressive shift from fiscal policy towards monetary policy as the main economic adjustment tool.

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