Interest rates will stay low

by Ed Bowsher on 24 August 2009  |  0 comments
Tweet

Central bankers are telling the FT that interest rates will stay low.

Interesting report in the FT today. The piece has a clear message: interest rates will stay low for a while yet.

Don Kohn, vice-chairman of the Fed (the US central bank) told the FT he saw 'no contradiction' between the commitment to keep interest rates low for an 'extended period' and the desire to keep inflation at moderate levels.

Erkki Liikanen, Finland's central bank governor said: 'there is no reason to re-assess our monetary policy stance.'

And Martin Feldstein, a professor at Harvard said he thought we could have '"two years or more of very low interest rates."

Yes, there's a danger that if interest rates stay too low for too long, inflation could take off. But central bankers still seem to be more worried about the risks of deflation and a prolonged recession. Mervyn King agrees. If he thought inflation was the No1 risk at the moment, he wouldn't have voted for the quantitative easing spend to be increased to £200 billion earlier this month.

Of course, there's no 100% certainty on this. We've been living through a financial crisis that is almost unprecedented, so it's hard to make predictions with certainty. The world's central bankers could be wrong and inflation might start to take off early next year.

But I think it's much more likely that inflation won't start to be a problem until 2011 or later.