Lower rates will return, amplify and raise challenges

Significance

The identification of the impact of wars and pandemics on interest rates has been difficult for lack of data. Recent research efforts have overcome this. Pandemics tend to push down rates by depressing aggregate demand and boosting precautionary saving.

Impacts

• Low real rates are associated with greater financial inequality, squeezed bank profitability and heightened private sector risk-taking.
• Market and policy estimates for global real rates see constant or rising real rates over a multi-year horizon -- this appears too hawkish.
• An entrenchment of low rates implies that unconventional monetary policies will remain, including central bank balance sheet expansions.
• Entrenched low real rates also imply that sovereign debt sustainability is higher than thought, and will be utilised more boldly.