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Rates do matter Markets bond yields, central banks, cheap money, monetary policy, rates MADRID | May 26, 2015 | By JP Marín Arrese | We take for granted that close to zero rates remain the driving force for delivering growth. The massive liquidity pumped in by Central Banks in developed countries has led to this widespread belief on the merits of cheap money. But such manna brings with it a number of drawbacks. The lack of any sensible reference for pricing in risks turns investment decisions into a perilous gamble. And the economic balance is severely stressed when savings are so harshly punished.

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The recent upsurge in the price of money has caught most observers off guard. Yet this development emerges as a natural outcome once recovery seems underway. The sudden hike in bond yields is driving money markets back to normal. They have been in a downward trend for too long, bringing yields to low historical levels. The FED, the Bank of Japan and the ECB have injected huge amounts of money in a desperate attempt to defuse deflation and put the economy back on track. As the danger seems to be abating, rates are making a solid comeback. While loose monetary conditions seem essential to stave off the threat of deflation, their enforcement cannot last forever. Otherwise, the lack of sensible price signals cloud any risk perception. A very dangerous state of play that could distort longterm economic performance. Furthermore, reducing policy to the goal of keeping low interest rates seems a self-defeating option. If it works properly, growth will force a sweeping shift in rates. On the other hand, the danger of feeding asset bubbles might cause severe disruptions. Monetary policy has played an outstanding role in preventing recession. But it cannot continue playing a leading role in an upswing. Reforms should emerge as the driving force for ensuring that growth maintains its momentum. If not, the current mild recovery might peter out before it becomes solidly

http://www.thecorner.eu/financial-markets/rates-matter/45927/

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Rates do matter | The Corner

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entrenched. The Jackson Hole three-prong policy remains the only valid one. Spain manufacturing PMI gains sharpest momentum since April 2007

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By JP Marin Arrese on May 26th, 2015. Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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