Singapore Green Jet Fuel Levy on Travellers Ignites Funding Debate
Interest rates may not return to previous lows
Since the global financial crisis, interest rates have fallen to historically low levels, leading many to believe that borrowing costs will remain stubbornly low. Some economists argue that ultra-low rates are not guaranteed and warn against the assumption that inflation and rates will automatically return to pre-pandemic lows.
The implications of this debate are significant for the global economy, as keeping interest rates high increases the cost of borrowing for (already indebted) governments and makes servicing mortgages expensive. A neutral level at which central banks can set interest rates without overheating or dragging down the economy is critical. Economists, including Charles Goodhart, suggest that factors such as rising protectionism, a shrinking workforce due to an aging population, and higher defense spending will drive up prices and hence interest rates. Goodheart sees interest rates stabilizing at around 4.5%, slightly below the current 5% level, which is the highest since the financial crisis. Other economists argue that technological advances, while potentially boosting productivity, may also increase inflationary pressures.
While economists who predict persistently high interest rates are still in the minority, their view is worrisome. Given already high debt ratios and the potential for them to rise further, governments could face significant fiscal challenges. The possibility of limited scope for rate cuts without the risk of inflationary pressure makes it difficult to maintain economic stability. As the debate continues, politicians will struggle to strike a delicate balance between setting interest rates to support economic growth without fueling inflation.