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What’s New About Today’s Low Interest Rates?

In an era when public debt write-offs are widely viewed as unacceptable and governments are often reluctant to write off private debts, sustained negative real returns are the slow-burn path to reducing debt. Absent a surprise inflation spurt, this will be a long process.

CAMBRIDGE – A day seldom passes without articles appearing in the financial press pondering why interest rates have remained so low for so long. This is one of those articles. So let’s start by clarifying whose and which interest rates are low and what is and isn’t novel or unprecedented.

Interest rates in emerging and developing countries are importantly affected by what happens in the world’s largest economies, and the ongoing multi-year low-interest-rate cycle has its roots in the United States, Europe, and Japan. Low rates are predominantly the advanced economies’ “new normal.”

Interest rates (short and long maturities) had been trending lower in most of the advanced economies (to varying degrees) since the 1980s, as inflation also fell sharply. In the years prior to the 2008-2009 financial crisis, former US Federal Reserve Chairman Ben Bernanke repeatedly stressed the role of a global “saving glut” (notably in China) to explain lower rates.