Central Banks’ Monetary Policy Impact Fades: Munich Re

Munich Re, the world’s biggest reinsurer, said monetary steps used by central banks to hold down interest rates amid muted inflation may soon lose their positive effect.

“There is a breathtaking amount of liquidity in the markets and monetary policy measures are about to lose their power, while side-effects are increasing,” Nikolaus von Bomhard, chief executive officer of the Munich-based reinsurer, told reporters at a briefing yesterday. “We are close to an inflection point in Europe where the side effects outweigh the benefit from monetary measures.”

The European Central Bank cut its benchmark interest rate to a record-low 0.15 percent in June and took its deposit rate below zero to help revive lending and growth. Policy makers “will act swiftly” with further easing if required, the ECB said last month. U.S. interest rates will probably stay low for a “considerable period” after the central bank ends the bond-buying program it has used to support the economy, the Federal Reserve said last week.

Von Bomhard said the biggest threat to markets is the risk investors are taking versus the return on investments. People are still in “risk-on mode” while spreads to lower-risk investments have narrowed to “unhealthy levels” in some areas, he said.

Reinsurers, which help primary insurers such as Allianz SE and Axa SA (CS) shoulder risks for clients, are under pressure to maintain earnings as prices for their coverage fall and low interest rates weigh on investment income.

Munich Re is sticking to investing in low-risk areas, von Bomhard said.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net Mark Bentley, Cindy Roberts

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