Real Interest Rate Forecasts

REAL INTEREST RATE FORECASTS

Twice a year we undertake an analysis of real interest rates for our publications Consensus Forecasts and Asia Pacific Consensus Forecasts (in May and November) and the resulting tables and analysis are displayed in both the hard-copy and PDF versions of the publications. Our analysis focuses on both short-term and long-term interest rate expectations.

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The table below shows a portion of the data from one of our surveys for 10-Year Real Interest Rates (from our November 2011 Consensus Forecasts survey), together with some textual analysis from the same publication.

Our regular analysis of real, i.e. inflation-adjusted, interest rates in twelve of the world’s industrialised economies compares the spread of their current long-term, 10-year government bond yields (see table above) with levels from our survey six months ago. There has been a dramatic plunge in many countries’ real 10-year interest rates compared with May 2011. Part of the reason for this has been the switch in focus from this year’s strong inflation expectations to the relatively more muted outlook for 2012 which has also dampened CPI projections over the next 10 years. This is especially evident with the fall in real bond yields for the United Kingdom and Sweden. Nominal bond yields have also tumbled sharply from May in the United States, Germany, United Kingdom, Canada, Netherlands, Norway, Sweden and Switzerland. This is likely due to the fact that in the midst of the Euro zone debt crisis, these countries are seen as comparatively safer havens for investors – at least for now. US bonds have been aided by positive GDP data which momentarily assuaged some (though not all) of the fears of another downturn. However, with the Euro zone likely entering recession again and no end in sight to the region’s financial crisis, the world’s other leading economies are certainly not out of the woods. The markets have lost patience with the lack of a meaningful Euro area rescue plan and few reforms to rein in public sector debt. Both nominal and real long-term real interest rates for France have barely budged from May but this belies the massive sell-off in French bonds as the financial markets turn their attention away from the debt-ridden periphery and towards the core Euro area. Italian and Spanish yields have soared to dangerously high levels (nominal Italian bonds continue to hover around 7%), making it incredibly difficult for their respective governments to pay back bondholders. The markets appear to be pressing for tougher austerity action, even though the growth crunch will make public financing even more challenging. Interestingly, Japanese nominal and real 10-year rates are no longer the lowest in the G-7 , though the country’s pool of domestic savings and ongoing local demand for bonds continue to keep yields low.

A portion of text from Consensus Forecasts, November 14, 2011.

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