The Interest-Rate Enigma
The prevailing view of today's ultra-low real interest rates in much of the world is that they largely reflects a fall in equilibrium, or “natural” rates, driven by changes in saving and investment fundamentals. But this explanation neglects the role of financial factors in pushing down real rates.
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BASEL – Today, the United States government can borrow for ten years at a fixed rate of around 2.5%. Adjusted for expected inflation, this translates into a real borrowing cost of under 0.5%. A year ago, real rates were actually negative. And, with low interest rates dominating the developed world, many worry that an era of secular stagnation has begun.