Reserve Bank of India Governor Raghuram Rajan is questioning whether current ultra-low interest rates are the right way to return to growth after the financial crisis.
Dr. Rajan said central banks warded off a collapse of the global financial system through bank bailouts and rate cuts. Central bankers, he said, were ‘heroes’ for halting the collapse.
But global growth since then had been disappointing, and Dr. Rajan said it was time to ask if there were better tools than the rock bottom rates used by major central banks in the rich world, including the U.S. Federal Reserve, Bank of England, Bank of Japan, and European Central Bank. Dr. Rajan said low rates could have unintended consequences. He said, for instance, that they could encourage people in their 60s to save instead of spend because the low returns mean they were unable to reach their retirement savings goal.
At a speech in Frankfurt, Dr. Rajan said he did not have the answers, but said it was time to ask, “Are ultra low rates the solution or part of the problem?”
Low rates could encourage banks and financial institutions to invest, but Dr. Rajan questioned whether that was leading to an increase in new businesses. “There may be no connection or only a limited one, if uncertainty holds back investment,” he said.
Appearing at Frankfurt’s Goethe University to accept the Deutsche Bank prize in financial economics, Dr. Rajan said he was making a last speech as an academic economist instead of as a central banker. Dr. Rajan, the former chief economist at the International Monetary Fund, won plaudits for predicting the possibility of a global financial crisis before the 2007-09 turmoil began. He is on leave from his post as finance professor at the University of Chicago.
Neutral stance
Asked about the RBI’s policy stance, Dr. Rajan said: “At this point we are neutral, we will see how things develop.’’ He said that inflation was not due just to higher food prices.
“Unfortunately there is still some inflation when you strip out the effects of food and energy. Therefore, it is not just food, it’s other factors also, which are driving inflation,’’ Dr. Rajan told reporters on the sidelines of a conference here.
“CPI core (inflation) is about 8.2 per cent, that is certainly high, but I think we are looking at all aspects of inflation at this point.’’
