Two key reasons why real long-term interest rates are set to remain very low – Natixis

Real long-term interest rates are very low in OECD countries at present. In the opinion of economists at Natixis, there are two reasons why real long-term interest rates cannot rise. 

The equilibrium between money supply and demand 

The first deep reason is the need to balance money supply and demand, while the expansionary monetary policies conducted have led to a very sharp increase in the money supply, both central bank money and money for non-bank economic agents. To avoid a drastic financial crisis, demand for money must be equal to the money supply. For this to happen, holding money must not be penalised compared to holding bonds, so nominal long-term interest rates must remain very low.”

Financing the energy transition

“The energy transition requires a sharp increase in the investment rate (for renewable energy production, networks, thermal renovation of buildings, decarbonisation of CO2-emitting industries, etc.) that is estimated at between 2 and 3% of GDP for several decades. For these investments, which are mainly long-term investments with relatively low returns, to take place, real long-term interest rates will have to remain low, otherwise, these investments will not be undertaken or financed.”