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Developments in interest rates
Last modified on 13 January 2010 at 12:50
Monetary policy is likely to be tightened over the coming six months as central banks seek to return the financial system to a more normal, less state-dependent, footing.
Interest rates continue to be at historic lows of near-zero for the US and 1% in the euro-zone (see chart: Short-Term Nominal Interest Rates). Central banks are also taking further steps to improve credit conditions through quantitative easing, ie the expansion of the money supply through the purchase of bank assets. Interest rates are unlikely to rise until the central banks see conclusive evidence of a sustained economic recovery.
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| Notes: | US: Certificates of deposit; Japan: three-month interbank rate.
| | Euro-zone: three-month interbank rate. Prior to 1999, rates are calculated using
| | national rates weighted by GDP.
| | Sources: | OECD Main Economic Indicators, IMF International Financial Statistics.
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Despite interest rates looking like they will remain at their current low levels for some time, there is nonetheless a view emerging among the central banks that financial markets are seemingly returning to normal conditions, albeit with credit remaining tight in some markets. There is a clear danger of the financial system becoming dependent on the central bank emergency operations, and so the ground is being prepared for a gradual withdrawal of this support during the coming year.
The Federal Reserve has signalled that it is likely that monetary policy will begin to be tightened mid-2010, once a few more quarters of positive growth have been observed and there is more evidence of a sustainable recovery ahead. Our forecasts for interest rates are largely consistent with this view, and we expect both the US and euro-zone to tighten policy and enter into an upward cycle over at least the next 2-3 years as growth, and inflationary expectations, return.