Quantitative easing

By Richard Dobbs et al

There is widespread consensus that the conventional and unconventional monetary policies that world’s major central banks implemented in response to the global financial crisis prevented a deeper recession and higher unemployment than there otherwise would have been… Anew McKinsey Global Institute report examines the distributional effects of these ultra-low rates. From 2007 to 2012, governments in the eurozone, the UK and the US collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks.

Although ultra-low interest rates boosted corporate profits in the UK and the US by 5% in 2012, this has not translated into higher investment, possibly as a result of uncertainty about the strength of the economic recovery, as well as tighter lending standards… We found little evidence that ultra-low interest rates have boosted equity markets. We cannot discern a large-scale shift into equities as part of a search for yield by investors, and price-earnings ratios and price-book ratios in stock markets are no higher than long term averages.

Although stock prices do react to announcements by central banks, these are transitory effects that do not persist. Ultra-low interest rates do appear to have prompted additional capital flows to emerging markets, particularly into their bond markets.

From “QE and Ultra-Low Interest Rates: Distributional Effects and Risks”.