Low interest rates are likely to return, but what else happens until then? The high-rise giants of this world – where most of the skyscrapers are

The times of very low interest rates are not over yet. Not all experts share this view, but apparently many do. That’s why the Bloomberg news agency called a report on new research findings: “Why low interest rates will return”.

There are several trends that have driven interest rates down since the 1990s – and likely will continue to do so. That is the conclusion drawn by Maurice Obstfeld, once chief economist at the International Monetary Fund (IMF). In his research he mentions demographics: people live longer and save more for old age. This has led to a global deluge of savings all wanting to be invested somewhere – and interest rates are falling. Obstfeld therefore says: “The low interest rates are likely to continue.”

The IMF recently analyzed the same trends and concluded: “In developed countries, interest rates are likely to remain close to pre-pandemic levels.” The currently high interest rates would therefore be an outlier, albeit a significant one. They are the temporary result of a double shock: Corona and Russia’s attack on Ukraine. The president of the Federal Reserve Bank of New York, John Williams, summed up his research: “There is no sign that the era of very low interest rates is over.”

When will it turn again?

But there may still be a long way to go before central banks can cut interest rates again. First there must be a victory over inflation. And in the past that has rarely been possible without bankruptcies, breakdowns and breakdowns. IMF deputy head Gita Gopinath recently warned of this in a speech: “There are only a few historical examples where inflation fell from very high levels – without a significant slowdown in the economy.”

It doesn’t look like an easy win this time either. On the contrary, inflation remains a mystery. “We don’t yet know exactly why it is so persistently high,” says Gopinath. The central banks have resolutely raised their key interest rates at a rate unprecedented in history – but not much has happened. In many countries the labor market is still booming: there are few unemployed people and many vacancies. Wages could quickly rise sharply and fuel inflation. Gopinath: “The effect of monetary policy appears to be less strong than expected.”

Why this is so remains in the dark – and the experts are puzzled by what lurks there. It could be a corona effect. During the crisis, people bought more products and then more services. They switched from home theaters and exercise machines to hotel stays and cruises. So there has been a major shift in the economy: away from industry to the service sector.

This shift may have changed the labor market. Because services are more labour-intensive than industrial goods: more people work in hotels or restaurants than in machine factories for the same added value. So if more services are needed, more people are needed for the same economic growth. This would explain what seems puzzling in many countries: the economy is not growing or hardly growing at all, but the labor market is doing well or even warmly.

The German economy is in recession, but the already low unemployment rate has fallen further recently. Jason Furman, former chief adviser to US President Barak Obama, observed the same contrast, noting “a very, very strange recession”. Switzerland doesn’t quite fit the bill; the economy continues to grow. But there was also a shift to services. Hospitality, package holidays and airline tickets are the areas where prices are rising the most while the industry is in recession.

That makes everything more difficult, explains IMF boss Gopinath. After all, central banks are having a hard time counteracting the price increases of services. Industrialists may be put off by high interest rates and buy fewer machines. That slows down the economy. Those who like to travel, on the other hand, usually don’t care what central banks do or don’t do with their key interest rates. You book your hotel anyway.

This could increase the risk that central banks will have to start with even higher interest rates. Because they fear one thing above all: that high inflation will become the norm. Higher costs would be passed on unhindered by the companies. Raise the prices! The workers would be kept harmless. High wages! Once that happens, the central banks need to get the bazooka out. Gopinath says, “The longer inflation remains high, the harder it could be to bring it down, and the more the economy should shrink.”

Higher interest rates, a recession at the same time – that can be toxic. The ECB warned of a “disorderly correction” in the real estate market. Prices would fall more than is actually justified. The IMF warned of financial crises. Banks and insurers must therefore be closely monitored. Nevertheless, the central bank should raise interest rates as high as necessary to beat inflation.

No island of inflation for the lucky few

Switzerland cannot remain indifferent to the way the fight against inflation is progressing worldwide. Certainly if the ECB were to act much harder, the SNB would come under pressure. As Alexander Rathke of the Economic Research Center at ETH Zurich (KOF) says, “The SNB cannot allow the ECB’s interest rates to be too much higher than their own.” If it did, it would weaken the franc, imports would become more expensive, inflation would be above the SNB’s target – and it would have to act.

It is not so far. In any case, the KOF does not expect that to happen. But their main forecast does not include a return to low interest rates either. Instead, the SNB will raise its policy rate from 1.5 to 2 percent – and leave it at least until the end of 2024. There will also be no downward rate swing before 2025 in the US or the eurozone. According to the KOF, it will take some time before inflation is under control again. (aargauerzeitung.ch)