Financial repression will define the economic landscape for at least another decade, according to professor of financial economics at Tilburg University, Sylvester Eijffinger, which has serious implications for institutional investors.
Eijffinger, who also is also a visiting professor at Harvard, sits on the monetary experts panel of the European Union and is an adviser to the International Monetary Fund, says negative interest rates are the major issue of our time.
Negative real interest rates are here to stay, a realisation that has huge implications for investors.
“Governments have to de-leverage risk in times of low growth and they are not prepared to increase taxes; they have to do it with financial repression,” he says. “As an investor, be prepared. You have to realise that low interest rates are here to stay at the short-end and possibly at the long-end of the yield curve. This has huge implications for investments.”
By way of example, he says the European Central Bank’s policy rate stands at 0.5 per cent, while the eurozone’s annual inflation rate is 2.5 per cent. The Bank of England keeps its policy rate at only 0.5 per cent, despite an inflation rate that hovers above 2 per cent. And, in the United States, where inflation exceeds 2 per cent, the Federal Reserve’s benchmark federal funds rate remains at an historic low of 0 to 0.25 per cent.
This will be the financial and economic environment of the immediate future.
He says negative interest rates, which he describes as a kind of wealth tax, are necessary for governments to de-risk, but they come at the expense of savers.
“People who save should be aware that governments need to do this for at least a decade,” he says.
Eijffinger will give a keynote address at the Fiduciary Investors Symposium, an event that brings together institutional investors to examine the power and responsibility of fiduciary investment.
Read an article by Eijffinger on the subject here.