In this presentation we compute real interest rates for 38 countries and the Euro area to identify the prevalence of negative real interest rates from January 1946 to August 2023. The real interest rate is defined as the difference between the Central Bank Policy Rate and the inflation rate, both expressed in annual terms. Data is from the Bank of International Settlements (BIS).
Until 1982, there was a relatively high occurrence of negative real interest rates, especially around the global inflationary periods associated with the oil shocks of 1973 and 1979. From 1982 to 2008, positive real interest rates became more prevalent. This is partly explained by central banks setting their policy rates above inflation rates to avoid repeating the inflationary periods of the 1970s and, in the case of some emerging countries like those in Latin America, of the 1980s. The rise in inflation in 2008 and the sharp declines of nominal interest rates in response to the Global Financial Crisis caused a surge of negative real interest rates, which prevailed until 2014. The sharp response of central banks around the world to the COVID-19 pandemic, which lowered interest rates, while there were surges in inflationary pressures, brought back a predominance of negative real interest rates. As central banks have been raising interest rates to combat inflation, real interest rates are gradually returning to positive values in 2023.
In the January 2000 to August 2023 period, 39% of the available observations correspond to country-month pairs of negative real interest rates. In Czechia (73%), United States (67%), Euro Area (61%), Denmark (59%), Canada (58%), United Kingdom (57%), Japan (56%), Croatia (55%), Argentina (53%), Hong Kong (52%), Norway (50%), and Switzerland (50%), where real interest rates were negative in half or more of the months with available information in the January 2000 to August 2023 period. On the other extreme, countries where negative real interest rates were less frequent included China (4%), Brazil (7%), Mexico (18%), Colombia (20%), Morocco (20%), Indonesia (21%), South Africa (21%), North Macedonia (21%), and Iceland (22%).
Over time, from 2000 to 2007, the percentage of country-month pairs of negative real interest rates were 7%, 10%, 11%, 17%, 23%, 23%, 14% and 6%, respectively. As mentioned, the rise in inflation in 2008 and the sharp declines of nominal interest rates in response to the Global Financial Crisis caused a surge of negative real interest rates, which prevailed until 2014. The percentage of country-month pairs of negative real interest rates from 2008 to 2014 were 43%, 31%, 46%, 54%, 35%, 38%, and 40%, respectively. Interest rates normalization and lower global inflation in years 2015 and 2016 explain the moderate declines in the presence of negative real interest rates, to 29% and 34%, respectively, but given the moderate surge of inflation in 2017 and 2018, 50% of the observed real interest rates were negative. The effects of the COVID-19 pandemic, the policy rates and inflation pressures caused that in years 2020, 2021 and 2022, 56%, 82% and 87%, respectively, of the country-month pairs corresponded to negative real interest rates. In the first 8 months of 2023, given the raising central bank policy rates, and the relative moderation of inflation, real interest rates were negative in 59% of the available observations.
In the presentation, we provide individual graphs for each country showing the evolution of the central bank policy rate, inflation, and real interest rate over the January 2000 to August 2023 period.