After key interest rates rose significantly in numerous countries and currency areas as a result of the surge in inflation, speculation about key interest rate cuts as early as next year is now beginning in view of significantly declining inflation rates on the capital markets. It is impossible to say today whether the widespread desire for lower interest rates on the capital markets will quickly become a reality. However, beyond the question of the specific timing of key interest rate cuts, there are more fundamental questions.
Before the inflation and interest rate surge, the view was widespread that the real interest rate level would remain very low for a long time, at least in the old industrial nations, for fundamental reasons such as demographics, low economic and productivity growth, and a transformation of traditional industrial economies into knowledge and service societies. Although there was never a consensus among economists on this issue, the number of supporters of fundamentally low interest rates had increased over time.
The argument that inflation will remain higher than before has disappeared
The question is: Has anything changed in this scenario as a result of the experiences of the past two years? Once the current inflationary period ends, will we return to a world with low real interest rates and, thanks to low inflation, also low nominal interest rates?
Or are those economists like Charles Goodhart right who expect permanently higher inflation rates for fundamental reasons, for example because the labor supply is declining and employees have the market power that leads to wage pressure? There is also the idea that the economic transformation towards a climate-neutral economy will require slightly higher inflation rates, at least for a few years.
What has disappeared, however, is the argument that inflation will remain higher than before in the long term because the central banks do not trust themselves to be able to combat inflation. Beyond the question of the timing of interest rate cuts, there are more fundamental questions about the future role of interest rates.