Analysis: Interest Rates could well be still at zero come 2030

As we head into September and the return of the schools after the summer holidays, many kids will now be thinking about Halloween and the prospect of trick or treating.

Halloween falls on October 31 and of course that date is also the latest deadline for Britain’s departure from the EU. A hard Brexit remains a real possibility, especially with the latest political manoeuvering from British Prime Minister Boris Johnson through his prorogation of the UK parliament.

But while Brexit remains the key focus for European politicians and financial markets, October 31 is also very important for another reason, as it marks the end of Mario Draghi’s reign as president of the ECB.

Mr Draghi along with German Chancellor Angela Merkel were the pivotal figures in keeping the eurozone together during the financial crisis. Even though the ECB has failed to achieve its inflation mandate of running close to but just below 2%, it is not for want of trying on Mr Draghi’s part.

The Italian will always be remembered for his July 2012 speech in London, when he promised to do whatever it took to save the euro. And Mr Draghi duly delivered on that promise, overseeing the “unconventional” policies of quantitative easing, or QE, and negative interest rates.

But as he prepares to ride off into the sunset, the clouds are darkening once more over the eurozone, with its largest economy, Germany, teetering on the brink of recession. The global trade wars have been a key negative for such a major exporting country.

This time last year it was assumed by most in the financial markets that the ECB would be talking about tightening monetary policy, but economic conditions have dictated otherwise. In fact, when Mr Draghi hosts his penultimate policy meeting as ECB chief on September 12, he is likely to announce further stimulus measures to boost the eurozone economy and push up inflation.

He has already said that all options remain on the table, including a further cut in the deposit rate, which is the rate the ECB charges for banks to place overnight deposits with the central bank. It is currently at minus 0.4%.

It is now quite clear that Mr Draghi will depart office on October 31 without having overseen a rate increase during his eight-year term as head of the ECB. And it is not inconceivable that his successor, Christine Lagarde, the former IMF head, will end up doing the same. Indeed, she is seen as very much in the same dovish camp as the Italian.

One has only to look at Japan to see that rates can remain extremely low for a very long time. It was in February 1999 that Japanese interest rates first hit zero, and 20 years on little has changed. “Japanification” is one of the current buzzwords in capital markets as investors and analysts wonder if Europe can avoid following in Japan’s footsteps.

Although some would argue that Japan’s ageing population has a lot to do it, personally I wouldn’t be surprised if Europe heads in the same way in terms of the length of time it holds rates at ultra-low levels. Even if European rates do go up in the next few years, it is likely to be only by a small amount.

And with another economic downturn more than possible over the next decade, rates will probably fall again over the period. So come 2030, rates may be little different to where they are now, which will have profound implications for both borrowers and savers.

The ECB’s main refinancing rate, which is the official trigger rate for Irish mortgage rates, may in 10 years’ time still be hovering very close to its current level of zero. Of course, Irish mortgage rates remain higher than their eurozone counterparts and that is something that needs to be addressed by the regulators. The most recent data from the Central Bank shows new mortgages agreed in Ireland stood at 2.99% but still well above the eurozone average of 1.61%.

But zero official ECB interest rates for a prolonged period can only be good news for Irish borrowers, providing some comfort against Brexit. “Japanification” here we come.

Alan McQuaid is an independent economist, at [e-mail]