Real Interest Rate Forecasts

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
Consensus Forecasts
United States Canada Australia New Zealand
Japan Netherlands China Philippines
Germany Norway Hong Kong Singapore
France Spain India South Korea
United Kingdom Sweden Indonesia Taiwan
Italy Switzerland Japan Thailand
Malaysia

 

The table below shows a portion of the data from one of our surveys for 10-Year Real Interest Rates (from our May 2021 Consensus Forecasts – G7 and Western Europe survey), together with some written analysis from the same publication.

 

 

 

Our regular analysis of real, i.e. inflation-adjusted, interest rates in 12 of the world’s industrialised economies compares the range of current long-term, 10-year government bond yields (see table above) with levels from our survey of six months ago. 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. As the chart below shows, real interest rates for all countries shown remain firmly in negative territory as G7 & Western European central banks ramped up QE during the pandemic, to keep longer-term government borrowing costs low as public debt soared to record levels. However, real interest rates without exception have risen somewhat from the exceptionally low levels seen in our last survey.

This is due in large part to a recent rise in 2021 inflation projections, and the fact that some sovereign bond markets are pricing in slightly higher inflationary expectations for the longer-term (most notably for the US). Last year’s sharp contraction in the global economy hit demand and, in turn weighed heavily on prices, so it is no surprise that base-year effects have pushed up forecasts for 2021 CPI. Moreover, the United States, United Kingdom, Canada and Norway are expected to see 10-year CPI averages above 2%. US near-term CPI is likely to be fuelled by US$1.9tn fiscal support, with further spending possibly around the corner. Fed monetary policy has also stayed extraordinarily expansive. However, Treasury Secretary (and former Fed governor) Janet Yellen perturbed the markets a few weeks ago by noting that interest rates might have to rise in the event of overheating. Given the US’s unprecedented debt load, this triggered some jitters. Euro area economies like Germany, France, Italy, Netherlands and Spain may have less to worry about with regards to inflation in 10 years’ time (expected between 1.5-1.8%). Nevertheless, their real bond yields have trended upward also.

A portion of text from Consensus Forecasts – G7 and Western Europe, May 10, 2021.