–  As regards our present diagnosis on the situation of the Eurozone we are very often asked several questions, in particular: “How do you assess the risks to price stability?” and “What is your judgment on the present conjuncture in Europe?”  The best I can do is certainly to refer to the consensus of the Council of Governors of the ECB as summed up by our President Wim Duisenberg. The European Central Bank confirms its position of “wait and see” with regard to its monetary policy stance. In an environment of increased uncertainty about the global economy and its impact on the euro area, the Governing Council is carefully assessing whether and to what extent upward risks to price stability will continue to decline. The ECB has the primary objective of maintaining price stability. Within its forward-looking strategy, the Governing Council had raised central bank interest rates to contain increasing inflation risks and to bring inflation back to levels below 2% over the medium term. This policy has retained credibility as demonstrated by continuing low inflation expectations. It is important for economic growth that the households of the euro area can rely on price stability preserving their purchasing power and, therefore, supporting solid domestic demand. Information from the first pillar shows that money growth has been on a downward trend since the spring of 2000, indicating that upwards risks to price stability from the monetary side have receded.
So whatever is gluing official interest rates to the floor in major economies is proving remarkably resilient. What factors are responsible? Are they temporary or permanent? And what are their implications for financial markets, the economy and monetary policy? There are many factors which explain the extra-ordinary current constellation of yields. Many of these factors pre-date the crisis. Global real rates have been falling for over three decades (Chart 4). They averaged 5% in the 1980s and 4% in the 1990s. So far this century, they have averaged 2%. Currently, they are around zero or slightly negative. At a Parliamentary Committee hearing a few years ago I asserted, boldly, that global interest rates were at their lowest-ever levels. A wise colleague challenged me afterwards: “How do you know they weren’t lower in Babylonian times?” Several exhausted research assistants later I can report that, luckily, I was on safe ground. Interest rates appear to be lower than at any time in the past 5000 years (Chart 5). The explanations for this secular fall in global real rates include excess savings in the East, deficient investment in the West, worsening demographic trends and rising inequality (Haldane (2015a)). Some have interpreted their downward drift as evidence of secular stagnation, in an echo of concerns raised after the Great Depression (Summers (2014)). Whatever the explanation, there has been a further ratchet down in global real rates since the crisis. I wish to focus on two factors which have contributed to this fall: dread risk and recession risk.