mojmir hampl : outlook for global interest rates speech by mr mojmir hampl, vice governor of the czech national bank, at the official monetary and financial institutions forum ( omfif ) roundtable for public sector asset managers, london, 30 january 2018. * * * my contribution to today ’ s discussion on global interest rates will focus on the equilibrium real rate of interest. the equilibrium rate, which determines the development of interest rates in the long run, has decreased around the world by about 4 percentage points since the 1980s, as documented, among others, by the influential studies of holston, laubach, and williams and rachel and smith ( 2017 ). very recently, it seems to me, the process has started to reverse, but any progress toward a higher rate is likely to be slow. equilibrium values do not change abruptly. seven principal reasons have been identified for the decrease in this parameter observed in the past : the first is a decrease in growth expectations caused primarily by the great recession and the ensuing process of de - leveraging. gloomy prospects depress demand for capital and, in consequence, also the equilibrium interest rate. currently, however, notions of secular stagnation are losing steam, and growth expectations have slowly been recovering to pre - crisis levels. it is perhaps useful to remind ourselves that secular stagnation has been declared many times in the past – by malthus, after the great depression, and during the 1970s and 1980s – only to be refuted by continued growth. second, we have seen a steady decrease in dependency ratios, which has stimulated excess savings and therefore lowered the equilibrium rate. this trend, too, will reverse soon, as the increase in the share of the elderly population will outpace all other population groups. dependency ratios around the world will rise, which will buoy the equilibrium rate. third, inequality has risen in past decades, again adding to the increase in the mean savings rate. but note that we are now observing a decrease in ( at least ) wage inequality in many countries, including the czech republic. inequality, broadly defined, has decreased in most countries around the world since the crisis ( world bank, 2016 ). i believe that the discussion on inequality tends to be overly pessimistic. fourth, more and more developing countries have been getting fully integrated into the world economy, releasing their supply of savings into global markets and giving rise to the notion of a “ savings glut ”. i see no reversal here

at all times, but it is even more critical when the federal funds rate is at or near its effective lower bound. in this environment, a decline in inflation expectations that drives up the real interest rate and thereby increases the real cost of credit cannot be offset by simply lowering the federal funds rate. thus, in a very direct sense, a fall in inflation expectations when the target interest rate is at the zero bound represents a de facto tightening of monetary policy and of financial conditions. such a tightening would clearly be highly undesirable at a moment when unemployment is too high, inflation is too low and the economy has only moderate forward momentum. in this situation, the fomc must be clear and resolute in its commitment to its price stability objective. this is why the most recent fomc statement clearly stated that underlying inflation was running somewhat below levels consistent with the dual mandate. there are a range of options we could pursue if we judged it worthwhile to go even further in communicating our objectives and intent. we could be even more explicit with regard to the inflation rate that the committee views as compatible with price stability, for instance, by stating an explicit inflation objective as is common practice in other advanced economies. this could help anchor inflation expectations at the desired rate. it would also clarify the extent to which the current level of inflation falls short of that rate. if we were to go down this path, it would be important to note that any provision of more information on our inflation objective would not be a signal that the inflation element of the dual mandate had become more important than the full employment objective. instead, it would principally reflect the fact that inflation being “ too low ” ( just like inflation being “ too high ” ) is an impediment to achieving the full employment objective of the dual mandate. if we judged it desirable, we could go still further and provide more guidance on how monetary policy would react to deviations from any stated inflation objective. one possibility would be to keep track of inflation shortfalls when the federal funds rate is constrained by the zero bound, as is the case today. for example, if inflation in 2011 were a 0. 5 percentage point below the fed ’ s inflation objective, the fed might aim to offset this miss by an additional 0. 5 percentage point rise in the price level in future years. in the current environment, such an approach would have some advantages as well as some disadvantages. when there is a large amount of slack in the economy