Macro Focus - Euro area: Quo Vadis R*?
Euro area: Quo Vadis R*?
  •  Demographics and productivity are the main drivers of interest rates in the upcoming decades
  •  Without an increase in potential GDP growth, interest rates will remain low and will have many unwelcome side-effects
  • It’s more difficult to stimulate the economy via monetary policy

Despite a very long economic cycle, interest rates across the world remain very low. Due to worries about the health of the world economy, most central banks yet again postponed any plans for monetary tightening. The universe of government bonds with negative yields is above $11 trillion and close to record highs. In general, different asset valuations suggest that the market is confident that rates are not going to rise for a very long time. And the market has good reasons to assume so. Due to ageing, the natural rate of interest (R*) is likely to be dragged down by about 1percentage point (pp) in the euro area over the next couple of decades before it starts to recover as the composition of savers- dissavers changes. To see how interest rates are affected by potential growth and demographics in the euro area, we conduct a scenario analysis. This clearly illustrates that many of the interest rate determinants lie outside of the central bank mandate. The success of governments in implementing productivity-enhancing reforms is the key to determining the direction of interest rates.

PDF-Document Read full analysis here

For more information about this report, please contact:

Vytenis Šimkus, +370 5 258 5163, vytenis.simkus@swedbank.lt

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