Interest rates, which sat between zero and 0.25% in the US and 0.5% in the UK for the past years, were supposed to go up this year. However, the Fed decided not to increase them while Andrew Haldane, the BoE’s chief economist proposed an interest cut instead of a raise.
With a rising number of critics of the low-interest environment, who are concerned about financial stability as return oriented investors choose ever riskier assets, the IMF published a report aimed to riposte these concerns. The report acknowledges the rising financial risks but states that higher interests are a wrong way of tackling them.
Since the onset of financial crisis, central banks went beyond the use of interest rates and added quantitative easing and new “macroprudential” policies like requiring bank capital buffers to their existing arsenal of tools. Some however fear that these are yet untested measures which might be too fragile to work effectively.
While the Bank for International Settlements called for higher interest rates and urged policymakers to focus less on short-term economic objectives, the IMF, which counsels the Fed, takes the opposite view on this issue since they consider that a rise in interests would intensify financial risk. It highlights the fact that the immediate costs of a rise would outweigh the longer-term uncertain gains. The fear that the longer interest rates are held at emergency lows, the greater the potential for trouble when they do eventually go up, still remains.
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