Economic ResearchPublicationsResearch PapersEuropeImpact of monetary policy on yields

Impact of monetary policy on yields

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The yields on long-term bonds no longer tie in with fundamental economic data like inflation and economic growth. The deviations can be explained by the impact of monetary policy.

Allianz SE
Munich, Jul 04, 2017
  • A marked change has meanwhile occurred in the way the ECB reacts to key fundamental data like inflation and capacity utilization. If earlier reaction patterns were to still apply, the ECB would have already ushered in the interest rate turnaround given higher inflation and improved capacity utilization. As key rates and the bond purchasing program influence long-term interest rates, the connection between fundamental data and long-term interest rates has loosened considerably.

  • Our monetary explanation approach for long-term interest rates in Germany returns actual values that are very close to values for the estimation period between 2000 and early-2017, with a declared variance of almost 99%. The yield-reducing effect of the ECB’s bond-purchasing program equates to an estimated 77 basis points.

  • We have then used three scenarios with different assumptions concerning ECB policy and US yields to estimate the potential trajectory of long-term rates in Germany until the end of 2019. Depending on the scenario, German long-term interest rates will climb to between 1.5% and 2.5% by the end of 2019. In all three scenarios we have assumed that the bond-purchasing program is phased out.