Central banks’ unorthodox policies explain low rates

Sir, In trying to explain the differences between UK and Spanish long-term government borrowing rates, Martin Wolf advances a number of plausible explanations ("What a floating rate gives and what it does not", April 26). These include different exchange rate regimes, differences in debt management histories, and the risk of a catastrophic eurozone breakup. However, Mr Wolf surprisingly omits discussing as an explanatory factor the resort to the highly unorthodox monetary policies being pursued by the various central banks of the major industrialised economies, including the Bank of England.

One would have thought that the dominant factor explaining unusually low long-term government borrowing rates in the US, UK and Japan, despite their highly compromised public finances, was the massive intervention by these countries' central banks in their long-term government bond markets. This would especially appear to be the case where those central banks have committed themselves, or are expected to commit themselves, to such large-scale purchases for extended time periods.

To be sure, the European Central Bank has introduced a highly successful Outright Monetary Transactions (OMT) programme that has offered to buy unlimited quantities of Italian and Spanish bonds with maturities of up to three years. However, it is not lost on markets that such purchases are conditional upon Italy and Spain negotiating economic adjustment programs with the European Stability Mechanism and the International Monetary Fund. Nor is it lost on markets that the political circumstances in Italy and Spain make it highly unlikely that either of these countries will seek to negotiate such adjustment programmes any time soon.

 

 

 

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Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
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    Email: dlachman@aei.org
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