Emerging from one of the deepest recessions on records the outlook for future interest rates remained mixed. After falling to close to 0% in US, Europe and UK, there is much debate about how much they will rise in 2010.
- Despite zero interest rates being quite rare in Western economies there are various factors at work which may keep interest rates low for the foreseeable future. These factors include:
- Depth of recession and amount of spare capacity means there is little prospect of future inflation
- Banks still reluctant to lend and this could hinder the pace of economic recovery.
- Governments face large budget deficits which will require higher taxes or lower spending. These will tend to depress economic growth in the next year or so and therefore lead to low interest rates being maintained.
- The scale of quantitative easing doesn't as of yet seemed to have really affected the broad money supply growth.
- Unemployment keeps rising and the prospect of swine flu could hinder growth further.
- If the Japanese experience is anything to go by interest rates could stay low for a while.
When will Interest rates rise?
- Despite the above gloomy factors. There are some more positive factors affecting the economy and which may cause a rise in growth rates and interest rates. In the UK, house prices have stabilised after two years of sharp falls. (why have house prices stopped falling) Although it may still be too early to call an end to the house price slump, it is an encouraging sign and could help the economy recover. Rising house prices would increase inflationary pressure and lead to higher rates.
- Recessions don't last forever and when the economy recovers, interest rates may leave their record lows to maintain a positive real interest rate. a 5% interest rate would be more typical if economies meet their 2-3% inflation targets
