• William De Vijlder, Group Chief Economist of BNP Paribas, explains how low or negative rates increases saving rather than consumption, which slows economic growth.
• He believes people are forward-looking and see low interest rates as requiring more savings to retire well.
• Low interest also creates a bigger mismatch between assets and liabilities as people borrow short term.
• He sees this developing into a cycle. Slower growth pushes the central bank to cut rates, which in turn leads to more saving and slower growth. The power of monetary policy stimulation is therefore reversed.
Why does this matter? Despite the rise in unconventional monetary policy, growth in the EU and Japan has remained muted. Instead low rates are leading to economic zombification. Fiscal easing may be the better policy path, but politically it is harder to enact.
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