This is a quickly penned thought on Andy Haldane’s recent comments on interest rates and deflation:
In a recent speech Andy Haldane of the Bank of England suggested that interest rates may well need to fall as opposed to rise following on from recent falls in inflation. I would agree that the secondary impacts of price declines need to be seen before we can assess whether or not these price falls could indeed trigger stronger deflationary forces.
For one, price declines may lead to lower revenues (note US retail sales) and lower revenues may impact on wage increases.
Secondly, lower revenues impact cash flows and cash flows impact asset prices, especially for high yield debt in sensitive sectors. Global markets remain especially sensitive to asset price movements and factors which may impact asset prices.
Thirdly, we are in a complex deflationary frame where aging populations, slowing population growth and relative weakness in corporate investment (note buybacks) is already a significant drag on the global economy. Falling prices could well trigger latent dynamics in this structure.
And finally, areas of the world which could well create the demand necessary to reinvigorate the frame, for example China where growth appears to be slowing sharply, may also be adding to tensions within the global growth frame.
So yes, interest rates could fall, in the sense of defending asset prices and attempting somehow (I do not quite know how) to reinvigorate or at least support demand, or rather maintain marginal cash flows.
But in reality we do not know because we lack at the moment a measure of the sensitivity of the frame to short term shocks of any financial or economic nature. We know the frame is weak and has been for some time but as to its sensitivity, we know very little.