Cheap money is killing the world

Quantitative easing is undermining monetary stability, warns Old Mutual.

The global “new normal” of reserve banks pumping billions into bond and stock markets while interest rates plumb zero is undermining monetary stability.

Quantitative easing, as the new stimulus is called, is a highly abnormal state of affairs, an artificial environment created by monetary policy, Old Mutual Macrosolutions Boutique economist Tinyiko Ngwenya warns.

New perspective

She argues the world needs to rethink what is required to get global growth back on track.

“Fiscal stimulus is what we need. The world is starved of investment,” Ngwenya argues.

“Central banks have been driving interest rates low, some even into negative territory, in an attempt to boost growth.

“The idea is that you get commercial banks to lend more so people spend that money, circulate it back into the economy and push prices up. But how much lower can interest go until we realise we have a problem?”

Ngwenya says the effectiveness of this strategy has become unclear. Rates in some parts of the world keep being pushed lower with no obvious, or even counter-productive effects.

Market volatility can also largely be explained by what happens at central banks. Every time a new set of data is released or a major central bank makes a statement, there is a reaction in anticipation of what it may mean for the next interest rate decision.

“The uncertainty around market expectations of monetary policy setting is driving the market crazy. The excessive focus on central banks is unhealthy,” Ngwenya says.

“We require more forceful policy responses from governments. That will likely be the next discussion point for markets going into 2017.”

Ngwenya believes this will also be true in South Africa, where low interest rates are not a concern, but a lack of growth is.

Junk looming

Ngwenya believes the risk of a downgrade to the country’s sovereign credit rating remains above 50%.

“For us to maintain our investment grade rating, policy reforms need to be addressed,” she says.

“Unfortunately, South Africa is in both a monetary and fiscal tightening mode, which does no favours to growth.

“And that is why we badly need investment.”