60 seconds with Huw van Steenis on why central banks are getting it wrong

Huw van Steenis explains why he thinks central banks have been struggling with the efficacy of their policies.

22 November 2016

Huw van Steenis

Huw van Steenis

Global Head of Strategy

Central banks are getting it wrong in part because they have the wrong models. They assume a frictionless economy, where money zips around and no-one ever defaults. Alas, this just is not the case.

This is also why quantitative easing is increasingly a spent force. Take, for example, the recent programme by the European Central Bank (ECB). It has offered to pay banks to lend money to the real economy and yet eurozone banks have taken less than 5% of the €1.6 trillion of loans the ECB has offered to pay.

If low rates are problematic, negative rates are probably even worse and central banks underestimate the negative impacts on the banking system itself. Take, for instance, Switzerland, where the Swiss banks have put up their prices rather than put them down.

So, what do we need to do? We need to put financial frictions into these central bank models. That does not mean going soft on the banks; we think the case for stress testing banks and having a resilient banking system is even stronger. But it means a greater focus on fiscal policy, on infrastructure spending and maybe thinking twice about the negative consequences of quantitative easing.

Huw van Steenis' full analysis is available here.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.