03 October 2016

CEPS: Ultra-low or negative yields on euro-area long-term bonds: Causes and implications for monetary policy

The importance of the ECB’s policy in driving down rates in the euro area is widely assumed to be substantial. But even the ECB does not attribute more than a one percentage point decline in rates to QE. The author of this study believes that the impact of QE has been much smaller.

Long-term rates have been subject to a strong global trend over the last decade, which is common to all developed economies.

Rates are generally lower in savings surplus countries (i.e. countries with persistent current account surpluses) such as Germany, Japan and most smaller northern European countries, than in savings deficit countries, such as the UK or the US.

But the differences have narrowed recently.

The existence of this global trend suggests that the influence of any one central bank might be limited. Real rates, i.e. nominal interest rates adjusted for inflation, are the key variable for savings and investment decisions. Their decline over the last few decades remains difficult to explain.

Latest research suggests that the decline is due to combination of factors, like lower growth plus higher savings and lower investment propensities.

But estimates of the right, or ‘equilibrium’ long-term real rate today are highly uncertain. Recent results vary from small positive (about 1%) to zero. If bond yields are driven by a global trend there is little the ECB can achieve by itself.

President Draghi has stated that, while monetary policy cannot change the long-term rate trend or equilibrium value of bond rates, it should try to lower rates below their equilibrium when there is a negative output gap and inflation persistently stays below target. The ECB thus tries to influence long-term rates by buying bonds, negative rates on its policy instruments and by providing ‘forward guidance’.

How much these instruments have influenced long-term rates remains a controversial question, but most estimates are below one percentage point. Gros (2016) argues that it has probably been much less; and the global downward trend of bond yields discussed here reinforces the view that the ECB’s influence might be rather limited. 

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