Central banks are reluctant to tighten too abruptly arguing spike in prices is transitory
The surge in inflation is leaving the world’s leading economies with their lowest real interest rates in decades, as central banks delay any abrupt tightening of the extra-loose monetary policy used to help weather the coronavirus crisis, arguing that the recent rise in prices is transitory.
Real interest rates, which subtract inflation from central bank policy rates, reflect the real cost of borrowing and real return on savings. The combination of accelerating inflation in the US, eurozone and UK, and their central banks’ decision to remain patient when it comes to rate increases, effectively raises monetary stimulus despite these countries being close to recovering lost output from the crisis.
Real interest rates “will remain at historically low levels for the next several years”, said Elena Duggar, managing director at the rating agency Moody’s.
In the US, where nominal interest rates are near zero, real rates stand at around -5.3 per cent. They are at -3 per cent in the UK and -4.6 per cent in Germany, according to Financial Times analysis.
Those remain highly stimulative interest rates, given that multiple studies suggest the neutral real interest rate — which neither deters nor encourages borrowers and investors — has fallen in developed economies to around zero today, from roughly 4 per cent in the 1980s.