Content Manager
February 5, 2021

The 700 year decline of interest rates

With news that we are heading towards negative interest rates, we discuss if this always our fate.

This week, the Bank of England took a step closer to introducing negative interest rates for the first time, agreeing to keep the rates at a record low for now, but have given lenders six months to prepare for such a move.

An impressively extensive data set, made digestible by Paul Schmelzing for The Bank of England, shows that the record-low interest rates we’re experiencing today have been a long-time coming. 

The data conveys the average annual decline of global real interest rates by -0.0196% (-1.96 basis points) over the past eight centuries.

If you’re wondering what we mean by ‘real interest rates’, this simply means that the market interest rate figure has been adjusted to remove the effects of inflation.

Let’s go back in time

The data set kicks off in 1311, with basis points being plotted up until 2018.

By zooming out to inspect the history of rates, we’ve been able to conclude that even before we entered the COVID crisis, things were already looking dire. In fact, it’s been heading down hill since their all time high in 1379. 

If put into long-term historical context, Schmelzing says the data reveals that real rates should always have been expected to hit “zero bounds” around the time of the late 20th and early 21st century.

The current low rate environment, he says, isn’t very unusual. 

However, Schmelzing says that the popular “secular stagnation” (persistent state of little or no economic growth) narrative used when talking about low rates, tries to put blame onto trends or productivity measures, when in fact, it’s been written in the stars all along.

Well, what’s the reason for the decline then?

It seems there is no reason. 

'There is no reason to expect rates to “plateau”, to suggest that “the global neutral rate may settle at around 1% over the medium to long run”, or to proclaim that “forecasts that the real rate will remain stuck at or below zero appear unwarranted” as some have suggested,' Schmelzing says.
Very low real rates can be expected to become a permanent and protracted monetary policy problem – but my evidence still does not support those that see an eventual return to “normalised” levels however defined: the long-term historical data suggests that, whatever the ultimate driver, or combination of drivers, the forces responsible have been indifferent to monetary or political regimes; they have kept exercising their pull on interest rate levels irrespective of the existence of central banks, (de jure) usury laws, or permanently higher public expenditures.

To summarise, rates were destined to fall - and no modern democratic environment was going to change that.

So, what now?

Chip’s Partnerships Manager, Paul, sheds some insight: 

Falling interest rates have hit savers hard, and the pandemic has only accelerated the consistent decline rates.” 
For young people saving for life’s milestones in cash deposits poses a serious shortfall risk - customers can not grow their money in cash.
Of course, the benefits of holding cash like liquidity and low volatility still exist, but people wanting to grow their money and outpace inflation, are looking to invest in markets that offer the potential for capital growth to help hit their goals. 
Chip is building an investment proposition to help people move from cash saver to investor - so stay tuned.

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