The stable output growth and historically low levels of inflation between the mid-1980’s and the onset of the financial crisis, a period often referred to as the “Great Moderation”, provides an alternative or complementary explanation for the downward trend in real rates. Here, the  1  Real interest rates were calculated using the observed market nominal rate minus CPI inflation. 2  Bernanke (2005). 3  Cf. IMF (2005). 4  Taylor (2009). Cf. also Borio and Disyatat (2011). 2  BIS central bankers’ speeches  basic argument is that, as macroeconomic volatility decreased, investors became increasingly willing to accept lower term and inflation risk premia on their investments, which could translate into a decrease in observed interest rates. Whatever the precise explanation may be, the downward progression of long-term nominal and real interest rates over the last twenty years has been conspicuous. Let us now focus on more recent developments. Recent developments The financial crisis and the global economic decline we have observed subsequently have both added cyclical pressure to this long-run trend. Low or negative output growth and dampened expectations of future growth naturally have a negative impact on long-term rates. In addition, the central banks of most mature economies have, of course, responded to the deteriorating economic situation, first by pushing short-term rates towards appropriately low levels and subsequently by exerting pressure on longer-term rates. As slide 6 illustrates, the first “conventional” monetary policy response was to bring short-term target interest rates to levels as close to zero as possible.

This, in turn, has raised the level of employment compatible with price stability, or, put differently, lowered the inflation rate for any given level of employment. The effects of globalisation may also be felt more indirectly through increased competition, both on the products and labour markets. On the products market, globalisation has eliminated the least productive domestic firms (those that set the highest prices) and reduced the pricing power of remaining domestic firms. It may also have created the conditions for wage moderation by increasing the degree of competition on the labour market. Overall, these developments have made it easier for Central Banks to bring down inflation without real costs to the economy. But it is doubtful that we can count indefinitely on such "tailwinds". Inflation only partly depends upon imported prices. Many goods and most services are still produced domestically with little competition from abroad. Domestic factors thus remain crucial determinants of inflation rates. Globalisation lowers the relative price of tradables to non-tradables in an open economy. But the overall level and dynamics of prices ultimately remain determined by the monetary authorities provided they ensure that steady growth in overall nominal demand is maintained through an appropriate monetary policy. 1 In addition, it is possible that the effects of globalisation on inflation will be reversed in the future. Strong growth in big emerging economies is increasingly putting pressures on the price of oil, food and other commodities.