European Central Bank chief economist Philip Lane told business leaders in Dublin that ageing populations were contributing to downward pressure on underlying real interest rates, which have been around zero or in negative territory in the euro zone in recent years.

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“In terms of magnitude, a wide range of estimates suggest that the downward impact on equilibrium real rates from slowing population growth and rising life expectancy over the period from 1980 to 2050 amounts to 1 to 2 percentage points in both the United States and the euro area,” Mr Lane said told a dinner hosted by the National Treasury Management Agency.

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He said as populations age individuals and pension providers face incentives to save more and put money in safe assets, such as sovereign bonds, which serve to reduce underlying interest rates. He said at a global level emerging economies were also increasingly putting their currency reserves into low-risk assets, while banks have been forced by regulatory reforms in the wake of the financial crisis to reduce their risk appetite and hold more safe and liquid assets.

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Meanwhile, the supply of such assets has been contracting in recent times, compounding the impact on rates. Doom loop “In terms of the supply of safe assets, the surge in public debt in the wake of the crisis and the operation of the doom loop between the risk profiles of banking systems and sovereigns has led to a relative contraction in the share of highly-rated sovereign bonds in the euro area,” Mr Lane said.

Read more @Irish Times