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Short term real interest rates to remain near zero for foreseeable future

30 Jun 2015

AQR Asset Management Institute hosts inaugural debate on monetary policy impact on global markets

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Short-term real interest rates (US) will remain near zero for more than three years, according to the majority of institutional investors, academics and policy makers polled at the AQR Asset Management Institute’s inaugural Perspectives event, at London Business School.

At the start, delegates were asked how much longer they expected short-term real interest rates (US) to remain near zero, with 38% answering more than three years. However, when polled on the same question at end of the discussion, delegates had hardened their stance with 53% saying more than three years.

Robert W. Jenkins, Chair of the AQR Asset Management Institute and Adjunct Professor of Finance at London Business School, who moderated the debate, commented: “A clear theme from the debate was that many market participants believe that central bank extraordinary monetary policy is driving the continued low rate environment, while many central bankers do not.” He added: “Interest rates are low - but not as low relative to history as many might believe so a return of rates "to normal" may surprise on the low side.”

Additionally, almost two thirds (64%) of delegates felt that Quantitative Easing is highly likely to create an asset price bubble – where prices become disconnected from reality. Three quarters (76%) said that over the next five years there is a low likelihood of global economies experiencing either high inflation or deflation.

The debate ‘Perspectives: Unprecedented Monetary Policy Intervention. The Current and Future Impact on Global Markets’ heard three distinct views – academic, investor and central banker – on the impact and efficacy of monetary policies.

Speakers included Raghuram Rajan, Governor, Reserve Bank of India, who presented on the challenges facing central bank policy makers in the current economic and political environment, Roger Urwin, Global Head of Investment Content, Towers Watson, Jeremy Stein, Moise Y. Safra Professor of Economics, Harvard University, and Lars Svensson, Professor, Stockholm School of Economics.

David Kabiller, Co-Founder of AQR, commented: “The event provoked lively debate and, as evidenced by the audience poll before and after the event, shifted perceptions. The Institute is proud to bring together scholars, policy makers and industry-leading practitioners to deeply probe a specific issue of vital importance confronting the global investment community.”
 
The audience heard how extraordinary monetary policies were crucial to restoring confidence in the early stages of the financial crisis, yet a continuation of the same policies now risks inflating asset prices to unsustainable levels and eroding general confidence in pension and insurance company retirement-related entitlements. Should current conditions persist, further risk and benefit shortfalls could result. Economic growth is needed to meet pensions liabilities but the outlook for economic growth is uncertain.

Jenkins continued: “The Institute seeks to address the challenges faced by both the investor and the investment management industry and be a centre for thought leadership. Our aim is to position London Business School as the post-graduate venue of choice for asset management-related research, study and recruitment.”

Founded in January 2015, the Institute promotes excellence in asset management, through a combination of research, funding, and awards schemes intended to further the sector’s ability to preserve and generate long-term wealth for individuals and societies.

The Institute’s next event will be a two day conference in London on 26 and 27 October 2015.