vitor constancio : the challenge of low real interest rates for monetary policy lecture by mr vitor constancio, vice - president of the european central bank, at the macroeconomics symposium, utrecht school of economics, utrecht, 15 june 2016. * * * the charts can be found at the european central bank ’ s website. the footnotes can be found at the end of the speech. this is the full text of a speech delivered in abridged form at the macroeconomics symposium at utrecht school of economics on 15 june 2016. ladies and gentlemen, i warmly thank the organisers for inviting me to the utrecht university macroeconomics symposium, a prestigious event dedicated this year to the low interest rate environment. low interest rates are prevailing in advanced economies where a third of public debt is in negative territory and deposit facility policy rates are negative in several of them. over the past decades, across major advanced economies both short - and long - term interest rates have experienced a significant decline and are currently at historical lows ( see chart below on long - term interest rates ). in 1980, long - term interest rates stood at 11. 4 % in the u. s. and 8. 5 % in germany. on average, over 2016 they have been about 1. 9 % and 0. 3 %, respectively and at about 0. 3 % for the euro area as a whole. short - term interest rates have witnessed an equally dramatic fall : in 1980 the interest rate on three - month treasury securities stood at 11. 4 % in the u. s. and 6. 4 % in germany ; this year it has averaged about 0. 3 % in the u. s. and minus 0. 5 % in germany. in the euro area, the overnight interest rate has been minus 0. 3 %. a striking feature of the current environment is the extent to which interest rates are in negative territory at different maturities across so many advanced countries ( see chart below on sovereign debt yields ). for example, yields in japan up to ten years are negative, and in the case of switzerland this extends to 15 years. why are interest rates so low? is monetary policy responsible? answering these questions is of crucial importance. understandingly, low interest rates are generating a degree of apprehension in some quarters about the potential negative implications for savers and for the financial industry, due to the compression of interest income. a superficial, impulsive answer is that rates are low because monetary policy

dynamics of nominal and real variables. this integrated framework is a cornerstone of our monetary policy strategy and guides the preparation of each monetary policy meeting, especially in the quarterly meetings in which new staff macroeconomic projections are presented together with comprehensive reports on monetary and financial developments. the over - riding focus of this analytical work is to make sure that monetary policy is calibrated to counter the cyclical forces that threaten the timely delivery of our two per cent inflation target. let me highlight some of the major open questions about current cyclical conditions. the over - riding cyclical feature is that inflation is currently very far above the two per cent target, with the prospect of a prolonged phase before inflation returns to the neighbourhood of the target. in particular, inflation is expected to remain high in the near term primarily due to the further upward pressure on the costs for energy ( especially gas and electricity ) and food over the summer, together with the ongoing passthrough to retail prices of input cost increases incurred in the earlier stages of production chains. at a mechanical level, the combination of base effects, the easing of supply bottlenecks and the completion of the re - opening phase of the pandemic recovery will contribute to inflation falling back over time from its current extremely - high levels. however, the monetary policy challenge is to assess the strength and persistence of the cyclical adjustment dynamics to these high inflation rates that, if left unattended, could result in an unacceptably - delayed return to the two per cent inflation target, with the associated risk that inflation that remains too high for too long could de - anchor long - term inflation expectations. in particular, the wider economic cycle will play a critical role in determining the responses of price setters and wage setters to the currently - high inflation rates. firms that have experienced declines in profit margins due to rising input costs and workers that have suffered a reduction in living standards due to the sharp increase in consumer prices will seek to restore the real value of their earnings and incomes. however, the wider economic cycle imposes constraints on the speed and the extent to which these adjustments can take place in a sustainable manner. in particular, a deterioration in the economic cycle would limit the capacity of firms to raise prices without suffering a loss of business and the capacity of workers to obtain wage increases without suffering a reduction in employment levels. the toll of unexpectedly - high inflation on real incomes and the real value of accumulated savings, the significant deterioration in the terms of trade ( especially