The power of low interest rates to boost economic growth is fading, according to Columbia Threadneedle – and it may now fall to fiscal policy to "do the heavy lifting".
In a note to investors, Columbia Threadneedle global head of fixed income Jim Cielinski cautioned that while the principal side-effects of low interest rates were initially expected to be positive, many of these benefits never manifested – and those that did have exhausted themselves.
“The longer we are in this environment, the more painful it will become for many market participants,” he said.
Mr Cielinski said savers, life insurance companies, pensions plans, investors seeking portfolio diversification, and policymakers were all now facing new challenges, and would continue to contend with these issues until the current low-rate climate ended.
New tools are required to overcome this, Mr Cielinski said, and it may now fall to governments rather than central banks to drive an improvement.
“Central banks have few policy tools left that are likely to achieve the desired outcomes; monetisation of debt is one option that will be considered by some, particularly Japan,” he said.
“Ultimately, it may prove to be the turn for fiscal policy to do the heavy lifting. This will take time, and may not be a panacea if improperly implemented.”