In Barcelona today, BBVA’s Executive Director José Manuel González-Páramo reflected on the factors that have influenced the current context of low, and even negative interest rates in developed economies. BBVA’s Executive Director shared his vision of what has led to this environment, the impact it is having on the markets and above all, where we are headed. In his opinion, low interest rates will remain for an extended period of time.
González-Páramo participated in the 25th anniversary of Inverco Catalunya where President Carlos Tusquets gave the opening speech. In his presentation titled, “Low interest rates: Where we are coming from, the impact and where we are going” BBVA’s Executive Director underscored that debate is currently focusing on estimating the amount of time low interest rates will remain, what will be the new equilibrium and what policies and strategies are appropriate for a change in trend.
What factors have caused the current interest rates?
BBVA’s Executive Director explained the factors that have led interest rates in developed economies to be at “historically low levels”. In his opinion, this situation is due to structural aspects like low productivity, a slowdown in the labor force and inequality, as well as cyclical factors related to the 2008 crisis.
In this regard, González-Páramo indicated that the reference rates have fallen 85% over the past 20 years in Europe and the U.S. In recent decades, he explained, different forces have put downward pressure on real rates. On the one hand, the credit supply has expanded, largely due to central banks’ monetary policy. The ECB’s balance growing by 150% since 2008 is an indicator of this. On the other hand, contraction of the demand for credit (investment) from falling productivity has declined dramatically in developed countries.
The reference rates have fallen 85% over the past 20 years in Europe and the U.S.
González-Páramo participated in the 25th anniversary of Inverco Catalunya where President Carlos Tusquets.
The impact on the market
José Manuel González-Páramo indicated that low rates in developed economies are having a significant impact on the banking system and stock markets.
The low interest rate environment has come at a time when European banks’ profitability is starting to recover after the financial crisis, but remains well below pre-crisis levels. In this regard, BBVA’s Executive Director recalled that banks are facing five major challenges - the recession, profitability, regulation, reputation and the digital revolution - and interest rates have played a key role in financial institutions’ falling profitability.
Banks are facing five major challenges: the recession, profitability, regulation, reputation and the digital revolution
In González-Páramo’s view, the solution involves banks adapting to this low interest rate environment by “taking advantage of the opportunities that the digital revolution provides”. Banks who do will have a relevant role in the new financial ecosystem. In order to do so, they should adopt agile technological architecture to enhance customer relations; generate profitable and sustainable value propositions based on the massive and intelligent use of data; and grow in different geographic locations, competing with fintech actors and technology companies.
Where we are headed
The key question is how long the low interest rate environment can last. BBVA’s Executive Director recalled Mario Draghi’s words on January 19th: “We continue to expect them to remain at present or lower levels for an extended period of time,” said the President of the European Central Bank (ECB).
José Manuel González-Páramo feels that although there is significant debate surrounding interest rates “at least in the eurozone, all signs seem to indicate that the low interest rate environment will be maintained in the medium term”. Given this prolonged scenario of low interest rates, BBVA’s Executive Director feels that it is fundamental to continue developing an appropriate macro-prudential policy. Furthermore, in his opinion, there is additional margin for other types of policies that should be exploited, especially in terms of structural reforms and fiscal issues.