Long-term interest rates fall again on world economy concerns

Ireland’s long-term interest rates are falling again, as part of an international move reflecting concerns about the outlook for the world economy. The State’s 10-year interest rates are trading at just over 1 per cent, while among investors, lreland’s two year interest rates have fallen firmly into negative territory.

The moves reflect rising expectations that international central bank will have to do more to stimulate growth, with the European Central Bank expected to increase its programme of quantitative easing in December.

All eyes this evening will be on the US Federal Reserve Board, whose latest policy statement is likely to focus on the fact that interest rates will stay low for a prolonged period, even if US base rates start to edge up either late this year or, more likely, early in 2016.

ECB president Mario Draghi said last Thursday the ECB would “re-examine” its policy stance at its final meeting of 2016. Investors quickly interpreted that to mean the ECB would expand its quantitative easing programme, its programme of bond-buying which is keeping market interest rates at historic lows.

Irish 10-year bonds yesterday traded at about 1.04 per cent, close to their all-time lows, while two-year bonds were trading at minus 0.2 per cent. Yesterday Italy sold two- year debt at a negative yield, despite its high debt levels, again underlining the unprecedented mood in international markets, with investors concerned about ow growth and inflation.

“We are effectively entering a new round of global easing,” said Dermot O’Leary, chief economist at Goodbody stockbrokers. This followed the ECB comments last week, a rate cut by China and a statement by the Swedish central bank today, which may extend its quantitative easing programme and signal an imminent rate cut.

Meanwhile, US rates were unlikely to start rising until next year. Market interest rates were now signalling a long period of very low rates in Europe, Mr O’Leary added, which would help hold down the cost of raising funds for the Irish Government and the banks, as well as keeping rates low for bank customers.

One factor driving down bond yields in countries including Germany, France and Ireland is Mr Draghi’s hint last week that the ECB was prepared to cut the deposit rate, which it charges on reserves parked in its coffers, in a bid to stimulate the euro zone economy and drive up inflation.

The ECB became the first major central bank in the world to experiment with negative rates when it reduced the deposit rate to minus 0.1 per cent last summer. It now stands at minus 0.2 per cent.

While negative-yielding assets sound like an anomaly, investors had now become accustomed to the phenomenon, said Nishay Patel, rates strategist at UBS – largely due to the aggressive monetary easing enacted by central banks since the financial crisis.

However, the impact on the single currency and euro zone bond yields of any ECB action will also depend on the response of other central banks.

The People’s Bank of China cut rates last Friday and analysts are split on whether the Bank of Japan will plump for more aggressive easing later this week. In the US, some Fed officials now appear reluctant to raise rates this year, while in the UK, markets are not pencilling in a rate rise until 2017, following further signs yesterday of weak UK growth.

Figures yesterday showed that UK GDP growth slowed to 0.5 per cent in the third quarter of 2015, from 0.7 per cent in the second quarter. – (Additional reporting Financial Times)