World Economy

Low Interest Rates Likely to Persist

Low Interest Rates Likely to PersistLow Interest Rates Likely to Persist

European Central Bank policy has increased the likelihood that interest rates will stay low for longer, requiring insurers and occupational pension funds to focus more closely on risk management, the EU’s insurance regulator EIOPA said on Tuesday.

“Monetary policy and low crude oil prices imply a protracted low yield environment in the short to medium-term,” the European Insurance and Occupational Pensions Authority said in its financial stability report, Reuters reported.

“In this environment, the ‘double-hit’ scenario cannot be ruled out, EIOPA said, referring to the prospects for insurers to be hit simultaneously by a rise in the value of their future liabilities and a drop in the value of assets held to meet those liabilities.

EIOPA Chairman Gabriel Bernardino warned that particularly for occupational pensions funds, prudential regimes might be underestimating the risks. EIOPA has made recommendations to improve clarity in this area, he said.

The regulator is currently conducting stress tests of how well the insurance sector can respond to financial stress.

Big, diversified insurers such as Allianz, Axa and Generali are seen as financially robust but smaller life insurers are seen as vulnerable the longer interest rates stay low.

Eurozone governments have eased up on efforts to overhaul their struggling economies because ultra-easy central bank policy has pushed their borrowing costs to record lows, ratings agency Standard & Poor’s said on Tuesday.

“We see a very strong relationship between government bond yields and the willingness (of governments) to engage in structural reforms,” S&P’s top EMEA analyst, Moritz Kraemer told investors at a conference in London.

Futile Efforts

“The moment the pressure goes away, the action goes away as well. All of these (reform) efforts from the governments have really fallen by the wayside under the palliative that the ECB is providing.”

The ECB’s €1.7 trillion ($1.92 trillion) asset purchase scheme has helped pushed government bond yields across the eurozone lower, with German bond yields out to eight years in negative territory.

Meanwhile, Germany’s ZEW research institution said, analysts and investors had a far sunnier view of the eurozone and German economic outlook in June than expected, though worries about a British retreat from the European Union continued to prey on respondents’ minds.

According to a closely watched survey of sentiment by ZEW, economic sentiment towards Germany leaped to 19.2 in June, from 6.4 countering expectations for a decline to 5.0, but still short of a long-term average of 24.4 points.

The ZEW data showed analysts’ and investors’ economic sentiment about the eurozone jumped to 20.2 from 16.8, as against a consensus forecast for a 15.3 reading.