Since the global financial crisis government interest rates have remained low, further exacerbated by the COVID-19 pandemic that has seen global economies come to a near standstill as countries have been forced to effectively shut down global trade.

Despite the re-opening of global trade and the optimism following the arrival of COVID-19 vaccines, the low-to-negative rate environment doesn’t look like it is going to change any time soon. 

In a post-Covid environment, which has seen economies come to the brink of collapse, central banks have had to intervene to support financial markets, with the resulting outstanding debts affecting fiscal policy for a long time to come.

A report by the asset management company, Schroders, paints a pessimistic picture of the medium to long-term future of interest rates: “In this environment, the pressure on central banks to keep rates low will remain strong. Not just to maintain overall policy stimulus, but to ensure that high debt levels remain sustainable. In this respect, the Fed will become more like its Japanese counterpart where low-interest rates are important to ensure government debt remains on a sustainable track”

With global nations experiencing the deepest recession of the post-war period, Schroder’s report predicts a continued low-interest-rate economy that is reinforced by high government debt levels.

The report also highlights the fact that, despite economic activity picking up in 2021, and short-term inflation, the low rate environment will persist for some time. In order for the Federal Reserve to bring the average inflation target (of 2%) back up, the Federal Reserve will need to maintain low rates, with periods of undershooting that will likely be followed by a spell of overshooting to bring the target back up.