The
years
2008-2019
were
extremely
unusual
by
historical
standards.
There
has
never
been
a
period
in
the
300
years
of
Bank
of
England
records
where
interest
rates
have
been
so
low
for
so
long.
Looking
forward,
a
generation
of
workers
will
now
need
to
adjust
to
global
interest
rates
that
are
up
to
five
times
higher
than
they
were.
Currently,
estimate
interest
rates
will
settle
between
4.5%
and
5.5%
–
a
range
not
seen
since
2008
and
certainly
one
more
reminiscent
of
the
1980s
and
1990s.
There
are
a
couple
of
fundamental
forces
that
point
to
a
higher
real
equilibrium
rate
than
we
have
seen
in
the
recent
past,
most
notably
productivity
growth
and
the
climate
transition.
There
are
likewise
a
couple
of
other
factors
working
in
the
opposite
direction,
such
as
demographics,
greater
economic
volatility
and
high
levels
of
government
debt.
Taking
all
these
factors
into
account,
we
expect
real
interest
rates
may
fall
back
from
current
peaks
but
settle
to
a
level
100-200
basis
points
higher
than
in
the
post-2008
world
in
the
long
run.
What’s
Influencing
Future
Interest
Rates?
1.
Productivity
Growth
There
are
good
reasons
to
be
a
productivity
pessimist
and
there
is
a
vast
body
of
research
pointing
to
explanations
for
the
slowdown
we
have
seen.
However,
we
believe
recent
productivity
performance
is
a
poor
predictor
of
future
performance,
and
that
productivity
is
on
the
cusp
of
a
generational
improvement.
The
key
contributing
factor
is
the
recent
explosion
of
generative
artificial
intelligence
(AI)
and
its
potential
to
revolutionise
working
practices.
Just
like
other
revolutionary,
general-purpose,
technologies,
AI
has
the
potential
to
bring
about
a
radical
transformation
of
the
economy
and
the
world
of
work.
2.
Demographics
The
impact
of
demographics
is
uncertain.
On
the
one
hand,
falling
working-age
populations
mean
capital-to-labour
ratios
are
likely
to
rise
over
time.
As
a
result,
not
as
much
investment
is
required,
putting
downward
pressure
on
real
equilibrium
rates.
We
have
seen
this
effect
play
out
in
the
past
decade,
as
the
prospect
of
falling
working
populations
has
affected
real
returns
in
countries
like
Japan
and,
more
recently,
China.
Likewise,
rising
longevity
means
people
will
spend
more
time
in
retirement,
so
households
may
accumulate
a
larger
stock
of
savings
before
reaching
retirement
itself.
On
the
other
hand,
an
ageing
population
means
more
people
will
transition
from
being
savers
to
being
spenders,
putting
upward
pressure
on
real
interest
rates.
Overall,
we
conclude
the
impact
of
demographics
on
rates
is
likely
to
be
small.
3.
Climate
Many
countries
have
committed
to
decarbonise
their
economies
over
the
next
30
years
to
hit
their
“net-zero”
emissions
targets
by
2050.
One
implication
of
these
commitments
is
that
the
size
and
nature
of
the
global
capital
stock
will
have
to
change
radically,
with
clean
“green”
capital
replacing
polluting
“brown”
capital
relatively
quickly.
That
transition
could
be
costly.
Any
rise
in
the
cost
of
capital
could
mean
higher
real
interest
rates
too.
A
New
Inflation
Environment
The
past
few
years
has
brought
several
extraordinary
events
affecting
markets
and
the
global
economy.
Such
disruptions
to
the
normal
functioning
of
trade
and
economies
often
result
in
a
higher
probability
of
extreme
outcomes.
We
may
well
see
a
rise
in
underlying
inflationary
pressure,
and
therefore
a
rise
in
the
average
policy
rate
required
to
hit
existing
inflation
targets.
Indeed,
inflation
targets
themselves
could
come
into
question.
And
even
if
they
aren’t
raised
de
jure,
central
banks
may
be
prepared
to
tolerate
inflation
deviations
from
target
for
longer,
especially
if
the
economic
costs
of
hitting
the
inflation
target
rise.
As
a
result,
investors
may
require
more
compensation
for
inflation
risk
than
they
have
in
the
recent
past,
causing
average
interest
rates
to
rise.
However,
we
believe
the
new
environment
will
be
a
more
rational
one
for
investors
and
savers,
with
safe
assets
yielding
a
reasonable
rate
and
riskier
assets
not
performing
on
the
basis
of
their
cashflow
fundamentals –
and
not
just
because
interest
rates
are
low.
It
won’t
be
painless,
and
businesses
reliant
on
low
interest
rates
(zombie
firms)
could
suffer,
alongside
borrowers
in
the
short
term.
Ultimately
though,
higher
interest
rates
mean
yields
on
all
types
of
assets
should
rise.
Shamik
Dhar
is
chief
economist
at
BNY
Mellon
Investment
Management
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