Today’s ultra-low interest rates are anything but ‘natural’

It is impossible to miss that central banks have cut interest rates at an unprecedented pace. A common view is that economic and demographic factors are forcing central bankers to move in this direction. This is a misunderstanding. Policymakers should not be let off the hook that easily.

Average interest rates in developed markets have been in steady decline over the past 30 years. This seemingly secular trend has inspired a plethora of theories about what drives it, from trade flows and productivity, to life expectancy and demographic shifts. Depending on your choice of timeframe, you can indeed see such factors moving with interest rates in the past few decades.

However, two variables moving in the same direction for a while does not mean their relationship is causal. Three years ago, Claudio Borio and his colleagues at the Bank for International Settlements published a paper suggesting that over the longer term, movement in interest rates are rather connected to changes in monetary regimes, such as a shift from the gold standard, or toward inflation-targeting. That suggests that central banks do indeed have a role to play in our current interest rate environment.

Moreover, it is clear that central bankers have political incentives to cut rates and keep them low. In economic…

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