
"Lower for longer" – interest rates remain low
“Interest rates will not rise appreciably in the near future,” says Michael Menhart, Chief Economist at Munich Re. The change of leadership at the ECB will also make no difference in this respect. In addition, he is concerned about the growing risk for financial stability resulting from persistently low interest rates.
Christine Lagarde takes over as President of the ECB from Mario Draghi in November. Do you expect the handover to herald a new direction for monetary policy?
ECB Governing Council. Recently there has been clear and open opposition to Mario Draghi from several Council members, who have called for a fundamental change of direction in monetary policy. She also could initiate checks on the inflation target to see whether it is still appropriate. Central banks are already in deep discussions about this. Christine Lagarde could also use the reputation she gained during her stint at the IMF to promote a more balanced policy mix among the governments of the eurozone. Such recommendations would include pursuing structural reforms as well as using leeway in fiscal policy. The latter might be directed at Germany. An improved policy mix could help to reduce dependence on monetary policy.
The economy is weakening, with the ECB's deposit interest rate at minus 0.5%. Is there any leeway at all in monetary policy?
Will interest rates rise again, at least in the long term? Or are we heading towards a Japanese situation?
So there is no light at the end of the tunnel?
What does this outlook mean for the insurance industry and for Munich Re?
Menhart: Persistently low interest rates ensure that the ‘hunt for yield’ on the financial markets continues, and that the danger of an overvaluation of asset prices rises. The International Monetary Fund, for example, is warning of risks to financial stability – not only because of possible asset price bubbles, but also because in many countries there has been a significant rise in corporate indebtedness, in particular. This is a dangerous side effect of central bank policy in recent years.
In reinsurance, a persistently low interest rate environment has an effect above all on
long-tail business, as interest income contributes less to earnings. There is some relief from the expectation of low inflation, at least in those segments in which profitability depends on economic inflation factors. And life insurance business shows how important it was to no longer rely on products with interest rate guarantees.
