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Ahead of the ECB’s governing council meeting, some analysts are warning of “collateral damage” from further easing.
Barclays has argued that the future is bright for negative nominal interest rates despite challenges posed by their adverse impact on pensions and a lack of credible plans by governments to deal with this.
PIMCO is expecting “a little bit more of everything” from the ECB, although it believes it is “close to exhausting its room to maneuver on interest rates” and may need to lean more on quantitative easing if more easing is required.
Amundi researchers, meanwhile, have suggested the ECB could be running out of leeway, warning of “increasingly significant collateral damage”, in particular because of the impact on the financial community of “too low yields”.
Barclays’s analysts also discussed the limits to negative nominal interest rates as a monetary policy tool in their equity Gilts study, settling on the conclusion that the future is bright for negative nominal rates (NNR). But this was not before they acknowledged several limits to their effectiveness and how low rates can go.
These, according to Barclays, include the “social and fiscal costs” of pension funds and insurers’ insolvency, in particular in those countries where these institutions face long-term nominal commitments.
At some point, according to Barclays, more deeply negative rates and declining risk spreads will mean that returns even on risky portfolios will be insufficient to meet pension funds’ liabilities, which are simultaneously under pressure from lower discount rates.
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