Key facts
- Low interest rates are unlikely to return due to structural forces.
- Governments are increasing debt for entitlement programs and military spending.
- Businesses are seeking funding for AI investments and rising operational costs.
- The pool of savings is shrinking as Baby Boomers retire.
- Inflation is a key force keeping interest rates elevated.
- Long-term rates are set by the market, not solely by central banks.
The era of cheap money is unlikely to return, according to market analysts, who point to a confluence of structural forces pushing borrowing costs higher. In the post-financial crisis world, interest rates were kept exceptionally low, but a shift is now underway.
Central banks globally, including the Reserve Bank of Australia, are reassessing their long-term interest rate targets, anticipating levels that will be higher than previously seen. While central banks like the Federal Reserve may lower policy rates, this is not expected to translate into a significant drop in overall borrowing costs for consumers and businesses.
Several factors are contributing to this outlook. Governments worldwide are increasing their debt burdens to fund social programs and defense spending, thereby increasing demand for credit. Simultaneously, businesses are seeking more funding for investments in artificial intelligence and to cover rising operational expenses. This increased demand for credit is occurring at a time when the supply of savings is diminishing, partly due to the retirement of the Baby Boomer generation, who are withdrawing funds from the market to support their retirement.