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QE and Ultra-Low Interest Rates

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QE and Ultra-Low Interest Rates

Distributional Effects and Risks

McKinsey,

15 min read
10 take-aways
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What's inside?

Low interest rates are a blessing and a curse.

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Editorial Rating

7

Qualities

  • Comprehensive
  • Analytical
  • Overview

Recommendation

Thanks to extraordinary central bank actions in the aftermath of the 2008 financial crisis, interest rates remain at historic lows. These “ultra-low” rates have played a major role in helping countries and companies recover from recessionary conditions. Low rates yield numerous benefits: Governments, corporations and individuals pay less to borrow; higher-yielding corners of the bond market, such as emerging markets, receive more attention from investors; and companies can expand and profit. But this picture will alter drastically when rates eventually rise, and those prepared for such an increase will be better able to weather the change. This accessible, well-documented report offers an overview of these unprecedented monetary policies and their possible consequences as they unwind. getAbstract recommends it to investors, consumers, executives and business owners who are concerned about higher interest rates on the horizon.

Summary

Financial Stress Pushes Rates Lower

To avert an economic meltdown after the most recent financial crisis and to stabilize the financial system, central banks in the developed economies drove interest rates lower. Several years later, economists continue to debate the “distribution effects” those actions had on governments, banks, pension funds, insurers, households and individuals. The steps authorities took and the policies they implemented were unprecedented – and many of them remain in place today. The tools policy makers used to mitigate the crisis and to support fragile recoveries included slashing interest rates to near zero and undertaking massive asset purchases, a process dubbed “quantitative easing” (QE).

So far, the evidence is mixed on what impact these measures have had and on which economic sectors have benefited. Governments and nonfinancial companies have clearly gained from having their borrowing costs slashed. Low interest rates have helped banks in the US but hurt banks in the euro zone. Life insurance companies offering fixed-rate investment products are experiencing difficulties, but buyers snapped up emerging economies’ higher yielding bonds. ...

About the Author

The McKinsey Global Institute is the research arm of McKinsey & Company.

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