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Where Are Real Interest Rates Headed?

In the past few years, many borrowers with good credit ratings have enjoyed a cost of debt close to zero or even negative when it is adjusted for inflation. In other words, real interest rates, and, thus, the real cost of borrowing, have been about zero. The rate decline has been global—average global 10 year real rate declined from 6 percent in 1983 to almost zero in 2012 (see figure).

Because the recent interest rate declines reflect, to a large extent, weak economic conditions in advanced economies after the global financial crisis, some reversals are likely as these economy return to a more normal state.

But how much of a reversal?

And what should we expect looking forward to the next five or ten years?

High and rising debt levels in advanced economies; population aging; monetary policy tapering; financial deepening in emerging market economies, which would reduce borrowing constraints and thereby net saving—these are all factors that would suggest a substantial increase in interest rates in the medium term.

Other factors, however, would work in the opposite direction: long-lasting negative effects of the global crisis on economic activity; persistence of the “saving glut” in key emerging market economies; and renewed declines in the relative price of investment goods.

The forthcoming analytical chapter of the World Economic Outlook constructs a new dataset of real interest rates for a wide set of countries and provides a perspective on where real interest rates and, more generally, the cost of capital are heading.

Watch the live webcast of the analytical chapters of the World Economic Outlook on Thursday April 3 at 9 am (EST) on, where we will discuss the IMF’s latest thinking on these issues.

WEO Chp 3