Interest rates existed long before Christ’s birth, presumably since people systematically managed their economies and traded. Today it seems as if this millennia-old history of interest rates has come to an end. Interest is being buried by the central banks. For example, the average key interest rate in the G10 countries is currently just 0.05 percent. In many cases, we are currently even dealing with negative interest rates – something that until recently economists thought was only a theoretical construct.
How did this state of emergency come about, and how long will it last? Zero interest rates are just the end point of a downward trend that has been going on since the 1980s. In turn, this is based on a prolonged downward trend in inflation rates, which can be observed quite synchronously in most countries. There is a whole range of explanations for falling inflation rates – for example, increasing globalisation, demographic ageing in many societies, the structural change in the economy from an industrial to a service society, or the success of monetary policy itself. For it was the battle won against the high inflation rates of the past that made low interest rates possible in the first place.
The new interest rate environment also leads to a new balance between debtor and creditor. Capital and liquidity are abundantly available, and default risks no longer seem to play a major role on the markets. Whether and how long all this can remain so also depends on whether inflation can be expected to return.