QE Genie Should Go Back in Bottle, UBS Asset Management Says

  • UBS says extreme monetary easing boosts currency volatility
  • Prolonged QE will distort financial markets, economy

Central banks should start taking back their monetary stimulus before unintended consequences further distort the economy and financial markets, according to UBS Group AG’s asset management unit.

While quantitative-easing programs in the U.S., Japan and the U.K. worked to limit the fallout after the last financial crisis, they increased foreign-exchange volatility, said Massimiliano Castelli, head of global strategy, sovereign markets, in Zurich at UBS Asset Management. He also blames QE for helping keep uncompetitive companies afloat and driving up asset prices beyond levels justified by fundamentals. The European Central Bank began a QE-inspired bond-buying program in March.

“Its costs are starting to outweigh the benefits,” according to Castelli, whose company manages 650 billion Swiss francs ($667 billion). “If quantitative easing becomes a core part of the central bank toolkit, it is very hard to argue that either sustained currency volatility or the protection of inefficient industries are positive for the global economy.”

Central banks around the world injected unprecedented amounts of money into economies following the financial crisis in 2008 to support growth. Still, even after hundreds of interest-rate cuts and trillions of dollars in QE, the global economy this year is flagging, and the bond market outlook for inflation worldwide is approaching lows last seen during the crisis.

Fizzling Inflation

In the U.S., Europe, U.K., and Japan, consumer-price expectations are now weaker than they were before their respective central banks began their last rounds of bond-buying, the main QE tool used to add fresh money into the monetary system.

Recent economic reports have renewed calls for major central banks to stimulate even more. Consumer prices in the euro region unexpectedly fell in September, deflation re-emerged in Japan, while wages in the U.S. stagnated again. The International Monetary Fund on Tuesday cut its outlook for global growth this year to 3.1 percent from a July forecast of 3.3 percent.

“Maybe the fact that quantitative easing is not delivering what policy makers were wishing suggests there are other factors at play which quantitative easing has no impact on, and these factors need to be considered from a policy perspective,” said Castelli. Aging populations, declining productivity growth and lack of long-term investment need solutions, he said.

Castelli spoke in an interview before UBS Asset Management presents a white paper on shifts in international financial architecture at the IMF and World Bank annual meetings beginning this week in Lima, Peru.

High Yield

At the same time, ultra-easy monetary policy has pushed government bond yields down to record lows, forcing some investors to accept lower credit quality to maintain returns. The yield on non-investment-grade debt dropped to 5.64 percent in June 2014, the lowest since at least 1997, before rising above 8 percent this month due to a selloff in that asset class. That’s still below the average of 9.6 percent in the past 17 years, according to Bank of America Merrill Lynch indexes.

The Fed and the Bank of England have said they plan to keep reinvesting repayments from their bond portfolio until after they begin raising interest rates.

“Quantitative easing was a vital tool in flighting a profound once-in-a-century risk, but there are now strong arguments that it is distorting and damaging capital-investment decisions,” Castelli said. “It cannot resolve the underlying problems that the global economy faces. The QE genie needs to go back in the bottle.”

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