Newsletter Q3 2017 UK

Several EU economies continue to struggle to maintain a stable growth momentum and lower unemployment.

partly because financing is cheap. Recent increases in house prices are also largely attributable to low interest rates, allowing for more favourable terms on new mortgage loans. There is hardly any definite answer to the question of whether the central banks are pursuing the right monetary policy. Instead, as is often the case with economic issues, it is possible to list advantages and disadvantages. The disadvantage of rate hikes is that they inflict higher loan costs on businesses and homeowners, who may be in dire straits if their budgets do not allow for a higher cost level. Rate hikes may cause corrections in the financial markets and in the property market. At the same time, rate hikes may depress favourable housing market trends as the financing of home purchases becomes costlier. In the past, we have seen that rate hikes as a response to rising inflation have resulted both in dramatic corrections in the pricing of investment assets and economic recession. But then again, rate hikes may limit possible bubbles in the financial and housing markets and give central banks greater leeway to cut rates when the next recession sets in. The advantage of keeping interest rates low is that money remains inexpensive, which may potentially have a substantial effect on the personal finances of Danish homeowners. Limited effect? In brief, the pursuit of expansionary monetary policy has given banks more money at their disposal so that they have sufficient capital to grant the loans required. At the same time, banks are faced with

portfolio of some USD 4,500bn, purchased by the Fed by means of quantitative easing measures in the aftermath of the financial crisis. In Europe, the situation is different. Several EU economies continue to struggle to maintain a stable growth momentum and lower unemployment. In addition, the full implications of Great Britain’s Brexit have probably yet to materialise. We therefore expect European interest rates to remain low, although the European Central Bank, the ECB, has hinted at upcoming monetary policy contractions, provided European economies show clearer signs of recovery. Signs of recovery are already seen in the economies of northern Europe, whereas the economies of southern and eastern Europe find it difficult to kick-start growth. The ECB is currently buying government bonds at a monthly rate of EUR 60bn. US rate hikes have been one of the factors causing long-term eurozone rates to edge up slightly, but strong demand for Danish government bonds, thanks to Denmark’s ”safe haven” status, has helped to keep Danish interest rates low. The present historically low interest rates date back to the aftermath of the financial crisis and the credit crunch, when central banks carried out substantial rate cuts and started to buy bonds to provide liquidity to banks and other businesses as an economic stimulus to accelerate growth. However, the effect on economic growth has been limited in many European countries. Low interest rates, on the other hand, have boosted the pricing of investment assets, including investment property and stocks, partly because the yield on government bonds is less attractive in a low interest rate setting, and

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