Low interest rates can’t last forever, warns Menon

Brace yourself for rising rates.

Time is running out for unsustainably low interest rates. In an interview with the Central Banking Journal, Monetary Authority of Singapore head Ravi Menon cautioned that the unusual monetary policies of recent years are slowly but surely coming to an end.

According to Menon, interest rates have been unusually low in the past five years, as part of an effort to lift wealth economies out of recession and prevent a collapse of the financial system. However, the policies have posed unique challenges for Asia, and the sooner monetary policy is normalised, the better.

“Most emerging market central bank governors that I have heard say that normalisation of monetary policy is welcome – all they want is that normalisation is done in a calibrated, clear, and orderly fashion. Some economies, which may not have been as cautious as they should have been during the boom years of easy money, may have a tougher time negotiating the exit of these policies. But it is hard to generalise across emerging economies,” stated Menon.

He further added that unconventional monetary policies have significant effects, such asvolatility in capital flows, pressures in asset markets, a general increase in financial stability risks and a flattening of the yield curve that distorts investment decisions.

“From the perspective of Asia, these extraordinary policies have helped by preventing the advanced economies from going into a prolonged recession. But the persistence of unusually low interest rates for such a long period has posed other challenges for us. We welcome the normalisation of monetary policy, and our hope is that it is done in an orderly fashion, in a way that does not disrupt markets. But some vibrations in the market can’t be entirely avoided. While it is early days yet, the bark of taper has been worse than its bite – meaning there were more disturbances in the market in May last year when tapering was merely hinted at compared to market responses when it actually began. One hopes this will continue to be the case as tapering progresses,” he said.

The interview can be read in full here.

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