Low Long-Term Interest Rates as a Global Phenomenon

26 Pages Posted: 5 Aug 2016

See all articles by Peter Hördahl

Peter Hördahl

Bank for International Settlements (BIS) - BIS Representative Office for Asia and the Pacific

Jhuvesh Sobrun

Bank for International Settlements (BIS)

Philip Turner

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: August 2016

Abstract

International linkages between interest rates in different currencies are strong, and ultra-low rates have become a global phenomenon. This paper compares how interest rates in advanced economies and in emerging economies are conditioned by two global benchmarks - the Federal funds rate at the short end and the "world" real interest rate at the long end. Real equilibrium policy rates (the natural rate) have fallen in many countries, and short-term rates worldwide have been further depressed by many years of the US policy rate close to zero. Nevertheless, changes in the Federal funds rate have less effect on longer-term rates, and thus on financing conditions, than is often supposed. The decline in the world long-term rate since 2008 has been driven almost entirely by a fall in the world term premium (negative in nominal terms since mid-2014). The world short-term rate expected over the long run has fallen only modestly over the past seven years or so, and is now just over 2% (compared with around 4% pre-Lehman).

Keywords: bond markets, financial globalization, natural rate of interest, term premium and shadow policy rate

JEL Classification: E43, E52, F41, F65, G15

Suggested Citation

Hoerdahl, Peter and Sobrun, Jhuvesh and Turner, Philip, Low Long-Term Interest Rates as a Global Phenomenon (August 2016). BIS Working Paper No. 574. Available at SSRN: https://ssrn.com/abstract=2818534

Peter Hoerdahl (Contact Author)

Bank for International Settlements (BIS) - BIS Representative Office for Asia and the Pacific ( email )

78th floor, Two International Finance Centre
8 Finance Street, Central
Hong Kong

Jhuvesh Sobrun

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, 4002
Switzerland

Philip Turner

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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