Why Have Interest Rates Dropped?

Interest rates keep falling. The latest plunge came after the vote in the United Kingdom to leave the European Union. Have we ever seen interest rates this low? And will they continue? NC State University economist Mike Walden responds.

“This is actually very, very historic in the sense that we have never, ever seen interest rates on the key 10-year Treasury bond this low, and by ever, I mean going back to the beginning of the country.

“So this has really been a major change in the U.S. and world economy. And I think there are several factors behind the low interest rates we are experiencing: Number one, inflation. Inflation appears to be very tame. It continues to come in at under 2 percent annually per year. The lower  the inflation rate, the lower interest rates can be because lenders have to get back inflation in the future on that interest rate.

“Another factor is that economic growth continues to be very slow, not only in our country but around the world. And when you have slow economic growth, that translates into weak demand for loans, so not as many people and businesses going to want to borrow money. That also translates into lower interest rates.

“And then the lastly, something that happened recently, I think the vote by the U.K. to leave the European Union is raising new fears about economic growth. It’s raising a lot of uncertainty. When we have uncertainty in the world, one thing that we have noticed is there is a flight to safety, meaning investors want safe investments, and those safest investments are still here in the U.S. in terms of U.S. government bonds — so more people wanting to buy those bonds, that pushes the interest rates down.

“Now, will these rates continue to stay low? I think they will persist for at least a while. So this presents great opportunities for borrowers, but it presents challenges, obviously, for investors.”

This post was originally published in College of Agriculture and Life Sciences News.