Financial repression: the unintended consequences

It is widely recognised that the extent of the global financial crisis has warranted swift implementation of a number of extraordinary measures to mitigate a deep recession. While these policies have been necessary to support the global economy, the time has come to take note of their possible implications for the financial system. To discuss and further analyse these implications, we held an executive roundtable with senior private and public sector representatives at the Centre. Ahead of the event, we had published the report “Financial repression: The unintended consequences” (see Supporting financial resilience and “Selected communication products of 2015”).

Participants of the roundtable expressed concern about public sector policies that are keeping interest rates at historically low levels. This financial repression not only results in an invisible tax on savers since it prevents them from earning interest on their deposits; it also means that future generations will have to shoulder the long-term costs – including the underfunding of pension provisions. Furthermore, people have had to compensate by increasing their savings, which, in turn, has weakened consumption growth and slowed down the economic recovery.

A second worry is that institutional investors have been driven by requirements and incentives into holding government debt instruments, meaning that they have less money available for productive investment, such as infrastructure projects. As one participant said, there is a global search for yield, which possibly leads to a misallocation of resources. Further distortions have been caused by the unprecedented active participation of public institutions in financial markets: Crowding out private investors may result in less diversification of funding sources and weaken a key element of financial stability.

In view of these implications, the participants at the roundtable agreed to continue working together to build the foundation for stronger and sustainable economic growth, benefiting individual savers, long-term investors and society at large.