The persistence of low interest rate

Facing a recession for years before the financial crisis in 2008, policy rate in Japan has long been lower than other developed countries.
The key questions at the moment are the questions about the future prospects of long-term real interest rates in developed countries and its impact on emerging economies.
The answer to the future real interest rates is based on both fundamental and monetary factors. The long-term fundamental factors, according to neo-classical economic growth theory, are population growth and total factor productivity. Population growth of developed countries has been declining as compared to the past. For example, population growth in Europe has dropped from 0.7% per year in 1970 to 0.3% per year now. Being an ageing society will also affect the long-term level of savings and real interest rates in many developed countries. In addition, total factor productivity in Europe has decreased from the past as well. Hence, one can conclude that long- term fundamentals will persistently keep real interest rates at the low level in the near future. Factors in the short-term that affect real interest include expected inflation, world oil prices and the direction of the future monetary policies among developed countries. At this moment, these factors are more likely to pull down the long-term real interest rates in developed countries.
The answer for the above consequences on the emerging economies will be based on the movement of capital flows from abroad into these emerging economies for a higher rate of return. Emerging economies have a higher rate of return due to higher risk premium and higher expected future public investment.
SME’s are expected to benefit from the low-interest rate. On the other hand, a fixed regular income earner and a retiree may find out soon that their returns from investments are simply not enough.   

Prof Arayah Preechametta is a lecturer on macro economic study at the Faculty of Economics, Thammasat University.