Variable-rate borrowers have rejoiced with interest rates in Canada and around the world returning to near-record lows in 2019. We’ve seen such rates for several quarters now, but several quarters could become several years.
That’s according to international central bank heads who spoke at the American Economic Association’s annual meeting in San Diego Sunday. The conference attracted policy-makers and economists from around the globe, and the takeaway was that today’s rates could fall even further.
Federal Reserve Bank of New York President John Williams, Bank of England Deputy Governor Ben Broadbent and the European Central Bank’s head economist Philip Lane all see the so-called “R star” (the neutral level of interest rates that neither drives growth nor restricts it) falling in the future.
“You could see R star go lower because of demographics,” Williams told those in attendance, saying an aging population results in slower productivity growth.
In fact, it’s already been driving down the neutral rate for years, but Lane says that “doesn’t rule out a scenario where it gets even lower.”
Don’t Discount Negative Interest Rates
While most central bank leaders were talking about interest rates falling, one in particular touched on the topic of negative interest rates.
Former Federal Reserve Chairman Ben Bernanke wrote several days ago in a blog post that sub-zero rates shouldn’t be ruled out:
“Situations could arise in which negative short-term rates would provide useful policy space…”
“…Entirely ruling out negative short rates, by creating an effective floor for long-term rates…could limit the Fed’s future ability to reduce longer-term rates by QE or other means.”
That, of course, is relevant for Canadian mortgagors because of the tight link between U.S. and Canadian rates.
But Bernanke’s tacit endorsement of negative interest rates runs contrary to some opinions of the world’s recent “experiment” with such monetary policy.
Sweden’s Riksbank, for example, officially ended its five-year trial of sub-zero interest rates last month. It had expressed concerns about the negative effects on the economy, such as boosting asset prices and debt and increasing the risk of a financial crisis.
Current Fed staff have also voiced concerns about negative rates, citing their “possible adverse side effects” as witnessed in other regions.
That said, “Differences between the U.S. financial system and the financial systems of those jurisdictions suggested that the foreign experience may not provide a useful guide in assessing whether negative rates would be effective in the United States,” read the FOMC minutes from its October 29-30 meeting.
Hope For Higher Interest Rates?
Some have expressed hope that interest rates will find an equilibrium and return to historical norms, including the Bank of England’s Broadbent:
“I do hope that over the next decade or two (that might happen),” he told the AEA meeting audience. Given all the factors working to suppress global inflation, however, that seems like a tall order.