Many influential interests and opinion-formers detest today’s ultra-low interest rates. They are also clear who is to blame: central banks. Theresa May, UK prime minister, has joined the fray, arguing that “while monetary policy . . . provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects. People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer. A change has got to come.”
So how might the government deliver such change? The answer is not obvious. As Ben Broadbent, deputy governor of the Bank of England, notes, real long-term interest rates have fallen to zero (or below) over the past quarter of a century. Furthermore, as the International Monetary Fund points out, core consumer price inflation has been persistently weak in high-income economies. Mr Broadbent argues: “With inflation relatively stable in all these countries, it’s hard to believe central banks were doing much else than . . . following a similar decline in the neutral rate of interest.”
At first glance, then, central banks are just following real economic forces while taking account, as they should, of recent demand weakness caused by the financial crisis and the excessive build-up of private debt that preceded it. An indication of this demand weakness is the persistence of financial surpluses (excesses of income over spending) in the private sectors of high-income economies — notably in Japan, Germany and the eurozone — despite ultra-low interest rates. This is why the Bank of Japan and the European Central Bank have remained particularly aggressive.