The era of rock-bottom interest rates may be drawing to a close, courtesy of a stronger-than-expected surge in inflation and massive government spending, according to economists at Goldman Sachs Group Inc.
Although the aftermath of the 2008 collapse of Lehman Brothers was characterized by persistently weak price pressures and negative monetary policy, Jan Hatzius and colleagues reckon decisions by the Federal Reserve and European Central Bank to adopt new frameworks, investments to combat climate change and higher household savings will likely change that.
“Stronger demand, especially for investment, along with the uptick in inflation expectations due to the pandemic inflation shock, suggest that we are on a long road to higher nominal interest rates relative to the post-global financial crisis world,” the economists wrote in a report.
Goldman said its analysis suggested the neutral rate of interest -- the policy setting at which growth is neither stimulated nor constricted, dubbed R* for short -- could get a 50 basis-point boost relative to the years following the global financial crisis.
“We expect nominal policy rates across most developed market economies to rise well beyond the rock-bottom levels now priced in the bond market,” they said. The economists reckon inflation will settle half a percentage point above pre-pandemic levels.
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