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Thursday, December 2, 2021

Soaring inflation has led to negative real interest rates in major economies




The surge in inflation has kept real interest rates in the world’s major economies at their lowest levels in decades as the central bank postponed any sudden tightening of the ultra-loose monetary policy used to help weather the coronavirus crisis and considered the recent price increases to be temporary of.

The actual interest rate minus inflation from the central bank’s policy interest rate reflects the actual cost of borrowing and the actual return on savings. The acceleration of inflation in the United States, the Eurozone, and the United Kingdom, coupled with their central bank’s decision to remain patient when raising interest rates, effectively increased monetary stimulus, even though these countries are close to recovering lost output from the crisis.

Elena Duggar, managing director of rating agency Moody’s, said that real interest rates “will remain at historically low levels in the coming years”.

In the United States, where nominal interest rates are close to zero, real interest rates are about -5.3%. According to the analysis of the Financial Times, they are -3% in the UK and -4.6% in Germany.

The bar graph of the difference between policy interest rates and inflation shows that real interest rates in advanced economies are seriously negative

Given the following, these interest rates are still highly stimulating Multiple studies Shows that the neutral real interest rate-which neither prevents nor encourages borrowers and investors-has fallen from approximately 4% in the 1980s to around zero today in advanced economies.

The last time real interest rates were as negative as they are today was in the 1970s, when rising energy prices pushed up inflation. research shows. The real interest rate is also fall After the 2008 financial crisis.

Ana Boata, head of global economic research at Euler Hermes Group, said that negative interest rates “keep financing conditions easy and should support credit growth because it makes the cost of debt sustainable.”

A line chart of policy interest rates minus inflation shows that real interest rates in advanced economies have fallen since the 1980s

This may help the government to finance the huge debts they assumed during the pandemic. However, because negative interest rates are stimulating in monetary policy, Boata warned that they could cause already highly valued financial markets to “become extremely unsustainable, raising concerns about financial stability risks”.

The biggest exception is China, where real interest rates are already positive despite the slowdown in growth. Last week, the Czech Republic and Poland joined Russia, Mexico, Brazil and other countries to raise interest rates. But higher inflation means that real interest rates are still negative. However, as inflation rates are expected to fall next year, real interest rates will turn positive—up to 3.3% in Brazil and up to 3% in Russia—reflecting the risk premium traditionally invested in emerging markets.

In advanced economies, although economists have recently raised their inflation forecasts in the context of supply chain problems and soaring energy prices, the central bank is only slowly canceling the large-scale stimulus measures implemented during the pandemic.

A line chart of annual percentage changes in the consumer price index by forecast date, showing that economists have raised their global inflation forecasts

Last week, Federal Reserve Chairman Jay Powell stated that it is too early to raise interest rates. The Federal Reserve, which has begun to scale back its bond purchase program, said that the US inflation rate-currently at a 13-year high of 5.4%-was caused by “expected temporary” factors.

Christine Lagarde, President of the European Central Bank Postpone Although the inflation rate rose to a 13-year high of 4.1% in October, interest rates are expected to rise next year. She said that the European Central Bank has also slowed down its pandemic bond purchase plan and expects inflation to fall next year.

Similarly, the Bank of England did not immediately raise the nominal interest rate from the historical low of 0.1% last week, although it predicted that inflation will fall back after reaching 5% early next year.

However, even if inflation does fall, real interest rates are still expected to be negative. According to the general inflation forecast for 2022, the real interest rate in the United States is expected to be around -3.3%, Germany -2.7% and the United Kingdom -3.2%.

Even for the central banks of Canada and Australia, which have already hinted that they might raise interest rates soon, inflation of more than 3% combined with close to zero interest rates means that their real interest rates are also negative.

“The real interest rate will be much lower than most estimates of neutral [rates] In the foreseeable future,” Capital Capital Macros Chief Economist Neil Schilling said.




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