Monetary Policy Is Doing ‘Serious Damage,’ Folkerts-Laundau Says

Folkerts-Landau: Monetary Policy Now Doing Serious Damage
  • Negative rates are ‘a poison’ for the financial sector
  • Must question looser policies, next step must be fiscal

Loose central bank policies may not have only run their course, but are now causing harm, according to Deutsche Bank’s chief economist.

“Monetary policy has reached its limits. In fact, now it’s at the point where it’s doing serious damage,” David Folkerts-Landau said in an interview with Bloomberg TV on Friday. “We have tried everything in the last six years via central bank policy to stimulate demand, and we haven’t succeeded.”

The economist highlighted that central banks have already enacted quantitative easing and said that “now we’re sort of just at the gates of thinking about helicopter money to make it work -- it raises this real question: what’s at the base of this lack of aggregate demand, and the next question is can you cure it with evermore aggressive policy?”

Central banks across the world have lowered interest rates and boosted stimulus in recent years in a struggle against wavering demand and low inflation. Folkerts-Landau says negative rates are weighing on financial institutions’ profitability at a time when banks face higher regulatory requirements, and that the prolonged period of loose policies has destroyed the impact of monetary policy to feed through to the economy.

“Once you reach that stage, then you want to ask yourself what can you do next, if you want to do something, and that next has to be fiscal policy,” he told Bloomberg’s Tom Keene and Scarlet Fu. “I hate saying that, but that’s the only way to go from here on out.”

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