The world’s developed economies are likely to face a deflation scare over the next 12-24 months, argues BCA Research, suggesting that interest rates are likely to stay low for some time.

“Our research on past real estate bear markets and subsequent banking sector stress (throughout Europe, the United States and Japan) highlights that these episodes always lead to a recession, followed by a multi-year period of sub-par growth,” it reports in a research note. In turn, BCA says that excess supply helps dramatically drive down core consumer price inflation in the years that follow.

“Granted, it could be argued that the previous episodes occurred during a period of strong structural disinflationary trends, thereby amplifying the magnitude and duration of the decline in price pressures. Nonetheless, core CPI inflation is likely to drop sharply throughout the G7 over the next 12-24 months, to lows at least comparable to the 2003 deflation scare,” it says.

The firm says it is likely that the U.S. records very low, or even mildly negative, headline CPI numbers, given the drag resulting from the recent plunge in food and energy prices. “Headline inflation is less likely to turn negative in Europe given the rigidity of the price structure but a deflation scare similar to the U.S. earlier this decade is likely,” it adds.

“The implication is that policymakers will continue to ease aggressively and then stay on hold for an extended period,” BCA concludes. “While the longer-term consequences of such actions may be inflationary, government bond yields will adjust lower in the near term.”