Real interest rates are expected to increase modestly with the normalization of global economic conditions, reversing the decline into negative numbers after the financial crisis, predicts a new study by the IMF’s Research Department.
Continued low real interest rates—the rate paid by borrowers minus the expected rate of inflation—will ease the burden of debt for borrowers but can also tie the hands of policymakers. A low real interest rate environment also enhances the chances that in the future the nominal policy rate may hit the lower bound (that is, zero), thereby losing a key monetary policy tool: lowering interest rates to stimulate growth. Because there is a risk that advanced economies will encounter continued very low growth, this limitation may materialize.
Any increase in current real interest rates is expected to be modest because the main factors contributing to the decline in real rates are unlikely to be reversed:
• Saving: emerging market economies’ saving rate increased significantly between 2000 and 2007, driving down interest rates. This increase is expected to be only partly reversed.
• Portfolios: since the financial crisis, demand for safe assets has increased—bonds over the increasingly risky stocks and other equity. This was also driven by reserve accumulation in emerging market economies. Unless there is a major unexpected change in policy, this trend is likely to continue.
• Investment: the decline in investment rates in advanced economies as a result of the global financial crisis is likely to persist.
Since the early 1980s, interest rates, or yields, on assets of all maturities have declined worldwide, well beyond the decline in inflation expectations. This means that real interest rates—the rates paid by borrowers corrected for expected inflation—have declined. Ten-year real interest rates across countries fell from an average of 5½ percent in the 1980s to 3½ percent in the 1990s, 2 percent over 2001–08, and 0.33 percent between 2008 and 2012
