The conventionalwisdom amongst financial market observers, academics, and journalists is that a steeper yield curve should be good news for bank profitability. The argument goes that because banks borrow short and lend long, a steeper yield curve would raise the wedge between rates paid on liabilities and received on assets – the so-called “net interest margin” (or NIM). In this post, we present cross-country evidence that challenges this view. Our results suggest that it is the level of long-term interest rates, rather than the slope of the yield curve, that drives banks’ NIMs.
Paul Schmelzing is a visiting scholar at the Bank from Harvard University, where he concentrates on 20th century financial history. In this guest post, he looks at how global real interest rates have evolved over the past 700 years.
With core inflation rates remaining low in many advanced economies, proponents of the “secular stagnation” narrative –that markets are trapped in a period of permanently lower equilibrium real rates- have recently doubled down on their pessimistic outlook. Building on an earlier post on nominal rates this post takes a much longer-term view on real rates using a dataset going back over the past 7 centuries, and finds evidence that the trend decline in real rates since the 1980s fits into a pattern of a much deeper trend stretching back 5 centuries. Looking at cyclical dynamics, however, the evidence from eight previous “real rate depressions” is that turnarounds from such environments, when they occur, have typically been both quick and sizeable.
Real interest rates have fallen by around 5 percentage points since the 1980s. Many economists attribute this to “secular” trends such as a structural slowdown in global growth, changing demographics and a fall in the relative price of capital goods which will hold equilibrium rates low for a decade or more (Eggertsson et al., Summers, Rachel and Smith, and IMF). In this blog post, I argue this explanation is wrong because it’s at odds with pre-1980s experience. The 1980s were the anomaly (chart A). The decline in real rates over the 1990s and early 2000s simply reflected a return to historical norms from an unusually high starting point. Further falls since 2008 are far more plausibly related to the financial crisis than secular trends.
My earlier post arguing that robotisation wouldn’t destroy jobs, slash wages or drastically shorten the working week prompted many thoughtful responses. Richard Serlin and others countered, arguing that if automation affects all sectors, then displaced workers may have nowhere to go. Others asked if the sheer scale, speed and scope of robotisation might make it much more disruptive. Or if wages fall, who will be able to buy the extra output? And Noah Smith raised the prospect that robotisation might eventually differ from earlier waves of innovation by replacing rather than complementing human labour. This post attempts to respond to those points, expand on the original post and explain why I’m still relatively relaxed about robots.
Economic theory generally assumes that more consumption means greater happiness. This post puts forward an alternative, “less is more” perspective based around the concept of mindfulness. It argues that we may achieve greater happiness by seeking to simplify our desires, rather than satisfy them. The result – less consumption but greater wellbeing – could be especially important for debates around secular stagnation and ecological sustainability.
Financial market prices provide information about market participants’ Bank Rate expectations. But central expectations can be measured in different ways. Mean expectations, derived from forward interest rates, represent the average of the range of possible outcomes, weighted by their perceived probabilities. On the other hand, modal expectations, which can be estimated from interest rate options, represent the perceived single most likely outcome. Currently, these market-implied mean and modal expectations for the path of Bank Rate over the coming few years differ starkly, with the mode lying well below the mean. In this post we argue that this divergence primarily reflects the proximity of the effective lower bound to nominal interest rates.
In this post we show how various secular trends – demographics, inequality and the emerging market savings glut – raised desired savings at the global level and put downward pressure on real rates. We also show how desired investment could have fallen due to the decline in the relative price of capital goods, lower public investment and a rise in the spread between risk-free rates and the return on capital. Together we think these secular trends can account for 300bps of the historic decline in the global real rate. Moreover, we think these secular trends are likely to persist. This suggests the global neutral rate, which acts as an anchor for individual countries’ equilibrium rates in the long-term, will remain low, perhaps around 1%. Continue reading “Drivers of long-term global interest rates – can changes in desired savings and investment explain the fall?”→
Long-term real interest rates have fallen substantially over the past thirty years. The co-movement in real rates across both advanced and emerging economies suggests a common driver is at work – the global neutral rate may have fallen. In this two-part blog post we attempt to identify which secular trends could have driven such a fall. In Part 1 we highlight how weaker expectations for global trend growth can account for around 100bps of the 450bps fall in real rates since the 1980s. But this effect seems to mainly apply to the post-crisis period – suggesting other factors are responsible for the protracted decline before the crisis. Continue reading “Drivers of long-term global interest rates – can weaker growth explain the fall?”→
Seven years after the financial crisis, global growth remains anaemic and the policy setting is nowhere near normal. Some commentators have suggested that this reflects some kind of ‘secular stagnation’ which set in before the crisis. This would have profound consequences for future growth and development in both wealthy and poorer countries. We are more optimistic, and see a raft of emerging technologies that could transform growth in many sectors. In this post, we summarise the current debate and offer our views on it.