Is the low interest rate era coming to an end?
The three horsemen
1. The end of the savings super-cycle
In developed-world economies a bulging section of the workforce has been busy saving for retirement over the past few decades just as China, in particular, has added a huge new pool of savers to global markets. Throw in a growing number of technology companies globally, which tend to have much lower demands for capital than more traditional firms, and the result is a world awash with savings. Low rates are an inevitable consequence.
However, times are now changing. As developed world savers retire they will start to spend. Meanwhile, previously thrifty emerging market savers are starting to do the same. As a result, interest rates will have to rise globally, whether Central Banks like it or not.
2. Traditional economic models are not working
In short, the key relationships on which they rely, such as that between the inflation and jobless rates (the Phillips Curve) may no longer hold true the way they used to in a global, high technology world. Traditional labour is now freer to move at will and unions have little power over wage rates, meanwhile large numbers of conventional roles are being usurped by automation.
All this suggests that short-term inflation and jobless data may have parted company meaning that the assumptions used by Central Banks to read inflation data and set interest rates may be defunct. The result? We may be storing up an inflationary shock if short-term interest rates have been held too low for too long.