Markets Projecting Low Rates for Longer

World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade.

Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a “secular stagnation” thesis floated by former U.S. Treasury Secretary Larry Summers.

The idea posits that the world is entering a peculiarly prolonged period in which structurally low inflation and wage growth – hampered by aging populations and slowing productivity growth – means the inflation-adjusted interest rate needed to stimulate economic demand may be far below zero.

As there’s likely a lower limit to nominal interest rates just below zero – because it’s cheaper to hold physical cash and bank profitability starts to ebb – then even these zero rates do not gain traction on demand.

For all the debate about the accuracy of that view, it’s already playing out in world markets, with long-term projections from the interest rate swaps market showing developed world interest rates stuck near zero for several years.

Take overnight interest rate swaps. They imply European Central Bank policy rates won’t get back above 0.5 percent for around 13 years and aren’t even expected to be much above 1 percent for at least 60 years.

via Reuters

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