Will ultra-low interest rates return? Bank of England research says global interest rates will fall to lows again

The Bank of England is reportedly engaged in a heated debate among economists about the future of interest rates. Its latest research suggests that, over the long term, global interest rates are likely to fall back to pre-epidemic lows. Bank of England analysts believe that weak productivity gains and longer lifespans will push the long-term neutral interest rate (known to economists as R *) back to its pre-epidemic record low. The findings add to a growing debate among economists over whether the ultra-low interest rate environment that followed the financial crisis will return. Inflation jumped after the lockdown was lifted, forcing central banks around the world to tighten policy quickly, pushing up borrowing costs.

"Our simulations suggest that longer lifespans and slower productivity growth have led to a significant decline in global R *," Ambrogio Cesa-Bianchi, Richard Harrison and Rana Sajedi, three BoE staff members, said in a blog post. "The upward trend in global longevity is not expected to change, so its impact on global R * is expected to continue." Bank of England policymakers such as governor Andrew Bailey were not named among the contributors.

Economists differ on whether an ageing population will cause interest rates to rise or fall, with some arguing that green investment and deglobalisation will push up borrowing costs in the long run.

BlackRock, Megan Greene, one of the Bank of England's rate-makers, and former Bank of England economist Charles Goodhart, among others, argue that the neutral rate has risen. Bank staff say global R * has fallen by more than 3 percentage points since peaking in the mid-1970s. In the longer term, they say, rates are likely to remain low unless productivity and demographic trends reverse or new economic forces emerge.