The era of global zero interest rates is over
Tiana Lowe
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Just a week ago, I asked whether the Federal Reserve’s decadelong experiment of easy money had come to a permanent end. With the Bank of Japan’s latest announcement that significantly modified its yield curve control framework, in effect reversing half a decade of negative interest rates, we have our answer.
The era of zero interest rate policy is over across the globe. The Federal Reserve, which has closed out 2022 with interest rates targeting the 4.25% to 4.5% range, predicts that interest rates will average 2.5% in the long run, higher than any target since the Great Recession. The Bank of England is just a point behind the Fed’s rates, and the European Central Bank reversed its own negative interest rate policy earlier this year, now with rates at 2%. Even Switzerland, long an inflation outlier in the developed world, reversed its negative interest rate policy.
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Japan has been the global holdout. Thanks to its disproportionately aging population that renders natural interest rates ultralow, Japan has long doubled down on exceptionally loose monetary policy to fight historical deflation. In 2016, the Bank of Japan tacked on a new tool: the YCC policy. Combined with negative interest rates, the YCC caps 10-year bond yields at zero.
So what did the Bank of Japan do to rattle global treasury markets? It has relaxed its cap on the 10-year yield to 50 basis points, or in layman’s terms, half a percentage point.
A decade of nonexistent borrowing costs, infusions of cash printed by central banks on the fly, and finally the government-mandated crippling of the economy resulted in a global inflation rate of nearly 10% this year. ZIRP was an experiment, and it has unequivocally failed.
The Bank of Japan maintains that it isn’t setting the stage to eliminate the YCC entirely and has coupled the announcement with an uptick in bond purchases, the exact opposite of the quantitative tightening enacted by our Fed. But the significance of this shift cannot be understated. The last holdout of easy money has blinked, joining the developed world in a monumental reversal. The era of ZIRP is over, not just in America but across the globe.
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