Analysis: Ageing could weaken central banks, spur rate volatility

Wed Sep 18, 2013 1:53am EDT
 
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By Mike Dolan

LONDON (Reuters) - Not unlike the ageing public - central banks will have to work harder as their economies grey and greater interest rate volatility over time may well be the outcome.

Monetary policymakers around the globe are already preparing households and businesses for the likely end of the present super-low interest rate era over the years ahead.

Yet despite five years of crisis-management in which central banks were the dominant and most powerful forces, some economists reckon they have been steadily losing their influence on the real economy in recent decades.

The success of inflation targetting in managing long-term expectations has in itself lessened the reverberations of interest rate moves, as did developments in housing finance and extensive credit deregulation.

But one reason cited for central banks losing that traction is rapid ageing populations.

On the basic 'life-cycle' assumption that younger people incur more debt and older folk have higher savings and assets as they hit retirement, the argument centres on the idea that debtors rather than creditors are far more sensitive to interest rates.

As that plays out in aggregate - and the data suggests it has over recent decades - then the risk is central banks will have to pull much harder on the interest rate lever as populations age over time to make an impact on the real economy.

And given the level of anxiety in world markets about just the beginning of the end of almost five years of near-zero U.S. interest rates, the prospect of more strident rate moves when they happen is a potentially daunting prospect.   Continued...

 
The Bank of England is seen in the City of London August 7, 2013. REUTERS/Toby Melville