Three Reasons Interest Rates Could Stay Low

Three Reasons Interest Rates Could Stay Low

Slow growth and no inflation. Long-term rates tend to correlate with nominal growth (inflation plus real growth) which has been below trend since 2000. The deceleration in nominal growth has mostly been driven by secular factors, including slower growth in the labour force due to changing demographics and slowing productivity. And these factors are likely to remain in place in the coming years. To the extent that both real growth and inflation in the United States remain suppressed, both nominal growth and interest rates are likely to remain below the post-World War II norm.

Changing demographics. Changes in demographics have an impact on rates beyond slower growth. Older individuals tend to borrow less and exhibit a preference for fixed income. This helps both lower the supply and increase the demand for bonds, in the process, placing more downward pressure on rates.

Supply and demand. Other forces constraining the supply of bonds as well as increasing demand are also helping to keep yields low and bond prices high. U.S. consumer borrowing remains well below its pre-crisis pace and, despite low real and nominal yields, and institutional investors are displaying a strong appetite for bonds.


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