03 Jul 2017
Interest rates in the world's major economies could remain depressed for years, as governments lean on consumer savings to help reduce national debts.
Macquarie expects long-term nominal interest rates to stay below nominal GDP growth in the US, the Eurozone and Japan, as governments seek to counter slowing labour force growth and tepid economic expansion.
Such induced policy is known as financial repression as it penalises savers and encourages them to spend their money.
In the wake of the global financial crisis, central banks cut benchmark rates to unprecedented lows and further devalued market rates through quantitative easing.
Indebted governments have benefited from low funding costs as capital flows from households to the state.
While the US Federal Reserve has started to slowly undo those cuts, Macquarie estimates 10-year US Treasury yields will peak around 2.3 per cent in the current cycle, a lower high than in previous instances.
This compares with Macquarie's forecast for 1.4 per cent nominal GDP growth from 2019 onwards.
“The big driver of this financial repression is demographics," says Macquarie Securities North America economist David Doyle.
“Demographics are imposing increasing strain on revenue growth, government budgets and entitlements. One way of providing a bit of a relief is by the central bank keeping interest rates subdued."
A global crisis effect
Outside the US, central bank policies are likely to remain supportive of low rates.
The European Central Bank's (ECB) path from credit growth to the end of bond purchases may take longer than the Federal Reserve's as the Eurozone wrestles with weaker growth, inflation and a rapidly ageing population, according to Macquarie analyst Matthew Turner.
The ECB, which is buying €60 billion in bonds each month, may not finish its quantitative easing program by the end of 2020, he says.
While Japan's private sector credit growth turned positive in 2006, the Bank of Japan (BoJ) may wait as long as 20 years from that point to end bond purchases, according to Peter Eadon-Clarke, Macquarie's Head of Global Economics.
Japan has the highest debt-to-GDP ratio among the three major developed economic regions, and is battling deflation and a shrinking population.
The BoJ has negative interest rates and is anchoring 10-year bond rates around zero through purchases.
“While the Federal Reserve has prioritised the withdrawal of monetary policy support, we believe the Eurozone is more likely to follow Japan in emphasising fiscal reconstruction and stabilising its public debt," says Eadon-Clarke.
Measuring the scope of financial repression
The Federal Reserve's long-run nominal GDP growth estimate is 3.9 per cent. While the central bank doesn't give forecasts for 10-year market rates, it has said it expects its funds rate to be 3 per cent. Macquarie sees the rate peaking at 1.5-1.75 per cent in the current cycle.
“Our long-run financial repression forecast appears to be significantly wider than the Federal Reserve's rate forecast suggests," says Doyle.
“The consensus is that interest rates will move significantly upwards, and our view is that they will probably stay around where they are now.
"We are in a world of financial repression, and that may mean that rates may not normalise to the extent that people anticipate."
For a copy of the report Macq-ro insights – Financial repression for decades, contact your Macquarie representative.