The International Monetary Fund (IMF) has released a blog post stating that real interest rates in advanced economies are likely to drop to pre-pandemic levels when inflation is tamed. The authors of the blog post also suggested that a transition to a cleaner economy in a budget-neutral way could result in lower rates in the medium term.
The IMF blog post added that the recent increases in real interest rates are likely to be temporary. As central banks from advanced economies raise benchmark rates to tame inflation, the return of real interest rates to pre-pandemic levels will coincide with the easing of the respective countries’ monetary policy regimes.
However, the rise in interest rates has sparked fears of a global recession. The authors of the blog post claimed that transitioning to a cleaner economy in a budget-neutral way could potentially lead to lower real interest rates globally. Higher energy prices, reflecting a combination of taxes and regulations, could bring down the marginal productivity of capital. But, deficit-financing of public investment in green infrastructure and subsidies could potentially offset and even reverse this result.
The authors also suggested that deglobalization forces could intensify and result in both trade and financial fragmentation. This outcome is likely to drive up the natural rate in advanced economies and down in emerging markets economies.
Terence Zimwara, an award-winning journalist, author, and writer from Zimbabwe, has written extensively about the economic troubles of some African countries as well as how digital currencies can provide Africans with an escape route.