Low interest rates – the new normal?
Are low interest rates the new normal? Many are beginning to believe this is indeed the case, while as many others are expecting interest rates to return to more historic normals (ie a Prime Rate of around 6%). Economists around the world are divided on the issue, and they all seem to have a good argument to support their position.
Michael Walker of the Fraser Institute has an excellent piece on on what the new natural rate of interest is and why we should follow it. And his argument is as much about the power of demographics as about anything else.
From his report "Why does population growth and its fluctuations matter for interest rates? Because it determines the relative number of (net) savers and borrowers in the population of a country. Young people are generally borrowers. Middle aged and old people are generally savers. The relative number of savers and borrowers and the size of their need for one or the other have a determinative impact on the market for loanable funds."
Read more on Michael Walker's Fraser Institute piece here The Natural Rate Of Interest