Half of the respondents to this month’s Off The Record survey thought that quantitative easing (QE) and outright monetary transactions (OMT) were effective as emergency monetary policy measures in stimulating economic activity, but were not a long-term solution. Some 27.5% of respondents thought the measures were not effective and that the money just sits on commercial banks’ balance sheets.
“Continued emergency measures create the risk that necessary fundamental economic reforms are not executed,” said a Dutch fund. A Portuguese fund added: “Money has to flow into the real economy - only investment projects will create new wealth and new employment. Otherwise banks will be fulfilling regulations, but won’t be fulfilling their role of credit providers.”
Nine respondents thought they were effective measures. A Danish fund said: “They are necessary - the money multiplier effect is running in reverse at the moment, because the banks need to accumulate reserves. In effect, we are [experiencing] deflation, and the central banks need to print new money to prevent us from entering a deflationary spiral like that seen in the 1930s.”
Three-quarters of respondents thought these monetary policies lower bond yields in the short term. “[They] will lower them in the short term because of supply and demand. In the longer term, it should create some ‘reflation’ at some point,” said a Danish fund.
Eight respondents stated monetary policies would have different effects on bond yields in the US, the UK and the euro-zone, and two respondents felt they would have little effect.
Just over half of respondents thought these monetary policies presented a significant inflation risk. A Dutch fund stated: “When this crisis gets into the next phase, there will be a large possibility of high(er) inflation for some years.”
Almost all respondents thought there was a danger that markets were becoming ‘addicted’ to monetary stimulus. “Whenever any statistic doesn’t show improvement, there is immediate expectation in the market for more QE. And when there is even a whiff of new QE, the markets respond favourably,” said a German fund.
Only three respondents believed there was no danger. A Belgian fund said: “Once the trust in the counterparties is back, there will be more normal economic activity. The whole crisis is one of confidence and trust. Only firm decisions and action plans can make this come back.”
Taking everything into account, 43% of respondents felt monetary policies to be helpful for pension providers, while 25% thought they were damaging. The remaining 32% were neutral. A German fund said: “They erode confidence in the ability to deliver on the pension promises made in the past using the financial and capital markets instruments of the present and future.”
However, a UK fund believed they “prevented an all-out collapse in economic activity”.