Excess liquidity and low nominal potential growth to limit monetary policy effectiveness - Natixis

Analysts at Natixis, point out that monetary policy will remain ineffective for a long time in some OECD countries (United States, United Kingdom, Eurozone and Japan).

Key Quotes: 

“We believe that monetary policy in OECD countries will remain ineffective at stimulating activity for a long time going forward”

“Nominal potential (long-term) growth will remain durably lower than in the past. This means that at the end of expansion periods, nominal interest rates will be lower than in the past, and that they will have little downside potential before they become negative”. 

“The liquidity offered by central banks and banks’ excess reserves are at very high levels, from which they will be very slow to fall - if they do at all. In the future, a policy of money creation (quantitative easing) will therefore be highly ineffective, as it will simply add liquidity on top of already-overabundant liquidity.”

“A further expansion in liquidity (resumption of quantitative easing) in the event of a fall in activity would be highly ineffective, as liquidity is already overabundant and banks’ excess reserves are at a very high level.”

“As is the case with fiscal policy also, the capacity for countercyclical action in OECD countries will therefore be reduced for a long time. It is interesting to see that because of the zero lower bound of nominal interest rates, the lower the level of potential growth and the lower the level of equilibrium inflation, the more the room to use monetary policy is reduced.”