Low interest rates are likely here for the long term, according to a report published Tuesday by New York City-based Moody’s Investors Service.
Unlike previous cycles, interest rates “are likely to rise only very gradually”, the report from the credit rating agency says, and they may not return to the levels they were at in the 10-20 years before the global financial crisis.
There are also several theories about why the natural level of interest rates may have fallen. “One is a decline in the trend rate of global growth linked to factors such as ageing populations, weak investment spending and weaker productivity growth,” the Moody’s report says.
Another theory is that “an increase in the supply of savings, without a corresponding decrease in the demand for savings, in the form of higher investment spending, would put downward pressure on the real interest rate,” the report adds. And as a higher proportion of the population enters the peak age bracket for saving (40-60 years old), savings may increase, putting pressure on the natural interest rate, the report says.
Another reason why policy rates are unlikely to return to their historic averages, according to the Moody’s report, is that the link between low rates and inflationary pressures is weaker now than before the crisis.
“Over the past seven years, policy rates have been at low levels in most economies and central banks have dramatically expanded balance sheets. Despite this, there has been little sign of a genuine and pervasive increase in inflation,” says Colin Ellis, managing director and chief credit officer EMEA, at Moody’s, in a statement.