{"id":31680,"date":"2012-08-16T14:24:00","date_gmt":"2012-08-16T18:24:00","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/08\/long-term-rates-dont-always-track-short-rates-boc-study\/"},"modified":"2012-08-16T14:24:00","modified_gmt":"2012-08-16T18:24:00","slug":"long-term-rates-dont-always-track-short-rates-boc-study","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/08\/16\/long-term-rates-dont-always-track-short-rates-boc-study\/","title":{"rendered":"Long-term rates don’t always track short rates-BOC study"},"content":{"rendered":"

By Central Bank News
\n
   A cut in short-term interest rates by central banks during an economic recession does not necessarily lead to a fall in long-term interest rates, according to a study in the Bank of Canada’s Summer Review.<\/span>
    Central banks typically use open market operations to control short-term interest rates and rely on this signal to be transmitted to the economically important long-term rates that govern the cost of credit to consumers and businesses.<\/span>
    But this transmission mechanism has not always worked as expected. In 2004-2005 when the U.S. Federal Reserve raised its policy rates to slow growth, long-term rates actually declined,  a phenomenon famously described as a \u201cconundrum\u201d by then Fed Chairman Alan Greenspan.<\/span>
    But a new model used by Bank of Canada economists shows that long-term rates are determined by two factors and this helps explain the conundrum, which in fact was part of a global phenomenon.<\/span>
<\/a> <\/span>    The first, and traditional factor, is investors’ expectations of the future direction of short-term rates. These expectations are typically based on either actions or statements from the central bank.
    The second factor is the extra return that investors demand for holding a risky asset. The two economists find this risk premium is largely driven by global macroeconomic conditions. If the economy is slowing down, investors demand a higher yield to hold on to long-term bonds.<\/span>
    “In particular, it is strongly countercyclical, rising sharply during global recessions and falling during global expansions,” the article said, adding:<\/span>
    “This is an important phenomenon that central banks must consider in their monetary policy decision-making process. For example, markets may be pushing down long-term interest rates at the same time that tightening by central banks would be acting to raise them. Thus, in order to have the required effect on long-term rates, a larger move in the short-term policy rate may be necessary.”<\/span>
    Click to read the article: “Global risk premiums and the transmission of monetary policy<\/a>“<\/span>

<\/span>    www.CentralBankNews.info<\/a><\/span><\/p>\n

\"\"<\/div><\/p>\n","protected":false},"excerpt":{"rendered":"

By Central Bank News    A cut in short-term interest rates by central banks during an economic recession does not necessarily lead to a fall in long-term interest rates, according to a study in the Bank of Canada’s Summer Review.    Central banks typically use open market operations to control short-term interest rates and rely … <\/p>\n

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