Twice a year we undertake an analysis of real interest rates for our publications Consensus Forecasts – G7 and Western Europe and Asia Pacific Consensus Forecasts (in May and November) and the resulting tables and analysis are displayed in both the hard-copy and PDF versions of the publications. Our analysis focuses on both short-term and long-term interest rate expectations.
|Consensus Forecasts – G7 and Western Europe||Asia Pacific
|United States||Canada||Australia||New Zealand|
The table below shows a portion of the data from one of our surveys for 10-Year Real Interest Rates (from our November 2019 Consensus Forecasts – G7 and Western Europe survey), together with some written analysis from the same publication.
From a longer-term historical perspective, an economic paper published in 2016 by the US Federal Reserve Bank of Minneapolis, “Real Interest Rates over the Long Run“, shows that long-term interest rates in the increasingly integrated G-7 capital markets have all been converging toward low or negative levels since the 1980s. The drop in real rates is also related to the low-growth, low-inflation, low-capital-cost, high-liquidity environment which has prevailed since the Global Financial Crisis of 2008-2009. So why are these conclusions about the last 40 years’ history of long-term interest rates important? Because real long-term rates affect government borrowing costs, household decisions on mortgages and car loans, not to mention businesses investing in new equipment or expansion projects.
The chart (above) compares current real interest rates with estimates from our survey of six months ago. While 10-year aggregated inflation projections (collected in October 2019) have barely changed from six months prior, the same cannot be said for 10-year nominal bond yield yields, which have dropped precipitously from 6 months ago. This reflects ongoing uncertainty over the trade outlook amid expectations of a steeper economic slowdown than expected. 2020 inflation forecasts have also trended lower for some G-7 economies, like Japan, Germany, France, Italy and Spain. A reduction in price pressures has prompted central banks, including the US Fed and the ECB, to reverse plans to normalise policy conditions. Along with US-led trade tensions, these events have depressed sovereign bond yields, which are inversely related to price. Most real 10-year bond yield estimates for all countries covered (table above) have dropped compared with our April 2019 survey. And the majority of G-7 real interest rates remain deep in negative territory.
A portion of text from Consensus Forecasts – G7 and Western Europe, November 11, 2019.