A Great Wave of Real Interest Rate Rises is Approaching The Global Economy
New Normal Consulting
Wed 29 Nov 2023 - 15:00 GMT / 10:00 EST
Summary
Paul Hodges raises concerns about the disconnect between nominal interest rates falling and the potential impact of deflation, questioning whether the focus on real interest rates is warranted. The central banks' response to rising interest rates is discussed, highlighting a shift from cheap fixed-rate debt to higher floating-rate debt and potential consequences for various sectors. Paul argues there is overinvestment by companies based on the assumption of sustained demand due to zero interest rates, as statements from the CEO of Dow Chemical show. He explores the challenges posed by aging populations, the bursting of the property bubble in China, and the potential for a deflationary cycle with consequences for various regions and sectors, including automotive and housing markets.
Topics
Central banks have kept real interest rates artificially low since the GFC
Inevitably, the market is now starting to take back control of rates
300 years of Bank of England data suggest rates average inflation plus 2.5%
Rates now appear to be returning to this basis, and may well overshoot initially
A return to this basis will impact corporate funding costs and profitability
It will also be a major shock to a generation brought up on the idea of zero rates
Rather than assuming a quick return to ZIRP, we need to prepare for this scenario
