Current high levels of financial repression create significant costs and lower long-term investors’ ability to channel funds into the real economy, a new Swiss Re study shows
26 March 2015, Zurich
- Since the financial crisis, US savers alone have lost roughly USD 470 billion in interest income
- Artificially low interest rates that go with financial repression lower incentives for policymakers to tackle much needed structural reforms in Europe
- Other unintended consequences of financial repression include potential asset bubbles, crowding out long-term investors in otherwise functioning private markets, increasing economic inequality and the potential of higher inflation over the long-term besides distorting private capital markets
- Swiss Re developed a Financial Repression Index, the first of its kind, measuring the extent of policymakers’ actions. Swiss Re has also quantified the costs of interest rates being at artificially low levels for households and long-term investors
- Financial repression describes official policies directing funds to markets that would otherwise go elsewhere and reduces diversification of funding sources to the economy, representing a risk for financial stability
Seven years after the financial crisis, central banks are still keeping interest rates at historically low levels. Low interest rates help finance governments’ debt and lower funding costs, as well as support growth. But such policy actions cause financial repression. This comes at a substantial cost for both households and long-term investors such as insurance companies and pension funds, according to a new Swiss Re report Financial repression: The unintended consequences.
