Pandemic seen to give rise to low interest rate regime

The prevailing pandemic will give rise to a period of ultra-low interest rates to support economies as they recover from scarring caused by the crisis, according to Capital Economics.

The London-based think tank said that for some countries, a combination of economic growth and low interest rates may enable recovery in the absence of new taxes.

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This is partly because taxes may only be raised once employment levels return to pre-pandemic levels.

“The economic legacy of the pandemic will be felt in changes to economic structures, an increasingly fractured global economy, and the need for a period of ultra-low interest rates to manage debt burdens,” said chief economist Neil Shearing.

In some economies, monetary policy is expected to be kept loose for the rest of the decade to manage the increase in public debt.

“Our view is that monetary policy will be kept extremely loose, in part to help manage the increase in public debt that has resulted from the crisis. If we are right, then real interest rates will remain in negative territory for some time – perhaps for the rest of this decade.” said Shearing.

“In that environment, the returns from equities are likely to beat those from government bonds.”

On Thursday, the Bangko Sentral ng Pilipinas (BSP) slashed interest rates by 25 basis points, the first easing since June, taking the policy rate to an all-time low of just two percent following the still steep decline in economic output in the third quarter.

In its report, the London-based think tank said the economic scars from the downturn which included business insolvencies, weak household consumption, and high unemployment would weigh heavily on demand for many months to come, necessitating the need for further support to the economy.

The economy declined at a slower pace of 11.5 percent in the third quarter coming off the record 16.9 percent contraction in the second quarter when stricter lockdowns were imposed.

The BSP can thus be expected to slash interest rates further as the pace of recovery remains weak, said Capital Economics.

This article was originally published by PhilStar.

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