Global | Rising wealth dampens UK and EZ interest rates

Bank of England MPC member Gertjan Vlieghe recently highlighted how the UK’s growing wealth will continue to put a damper on gilt interest rates. Our analysis shows that the private net wealth-to-GDP ratio in the eurozone, while lower, will follow a similar trajectory until 2050. Thus, the downward pressure on interest rates will be similar in the UK and the eurozone.

What you will learn:

• Both Vlieghe’s and our analysis are based on demographic change, which has been the most important force behind the drop in eurozone interest rates since 1980. 
• We extend Vlieghe’s argument to net foreign assets, which are the difference of private net wealth and the domestic supply of assets.
• We find that the UK will remain a net debtor, with net foreign assets falling below the current -15% of GDP after 2030, whereas the eurozone will become a net creditor within a few years.
• The relatively constant trajectories suggests that, other things equal, the real long-run euro and sterling exchange rates will depreciate against a strengthening US dollar.