Global real interest rates to remain low in coming years

11 April 2014

Xinhua, London :
Continued high savings rates in emerging economies and weak investment in advanced economies suggest that real interest rates will remain low for "many years", said Andrew Kenningham, Senior Global Economist at Capital Economist, in an analysis piece Wednesday.
Three reasons attribute to the judgment, he said.
"First, demand in advanced economies looks set to remain fairly sluggish because of the legacy of the global financial crisis. Second, savings rates in some emerging economies are structurally high, and are unlikely to revert quickly to their 1990s levels. And third, policy-makers in several countries have an incentive to keep rates low in order to help the economy cope with high levels of public and private debt."
And especially in economies like Japan and the euro zone, policy-makers have a "strong incentive" to keep rate down, said Kenningham.
Policy-makers in Japan face an "uphill task" to permanently raise inflation and to put public debt on sustainable path. And similarly, the European Central Bank will come under pressure to keep rates very low in order to help peripheral governments reduce their debt burdens through the process of "financial repression", particularly given the threat of deflation, noted Kenningham.
In its latest World Economic Outlook released Tuesday, the International Monetary Fund also stressed that during the coming few yeas, "there is no compelling reason to expect real rates to return to their average level of the mid-2000s (that is, about 2 percent)".
The estimation is coordinated with the views expressed by some advanced countries' policy makers, including Federal Reserves Chairman Janet Yellen, and Bank of England Governor Mark Carney.
The London-based economic research company reckons that the Fed is likely to raise interest rates relatively quickly because the United States recovery is stronger and it has less need to keep real interest rates low to tackle excessive debt.
Nonotheless, "we still think the Fed will keep rates below their long-run 'normal' level for at least the next two or three years, even if they are eventually increased more rapidly than the market current expects," added Kenningham.

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