At the ACT Annual Conference last month Stephen Boyle, RBS’s Chief Economist presentation on interest rates entitled ‘Lower and still’. His compelling reason as to why low interest rates are here to stay went as follows:

• real interest interest rates were falling long before the crisis - they have been falling since before 1995
• underlying growth in advanced economies was falling long before the crisis
• today the world saves more than it invests, unlike the 1980s and 1990s and the proportion of “savers” in the world’s population has risen
• many countries flipped from borrowing to saving after the “Asian Crisis”
• the cost of buying capital services has fallen and public investment is in long term-term decline
• global indebtedness has risen since the crisis.

He concluded, “So slow growth, more saving, less investment and higher debt are what have brought us to a low interest rate world.” and why they are likely to remain low. After this he reminded the audience that low interest rates matter, not just to banks, but to anyone with any financial assets or a pension, such as the shortfall in the British Steel pension fund. 

The problem and the answer

Boyle believes that one of they ways out of the current malaise is for there to be more more investment by government and businesses. But there is a problem: they both have high hurdle rate of return for projects, even in this low interest environment. (He noted that Japan where tthey have had low interest rates for decades, the hurdle rate for projects has not fallen.) He then made an passionate plea corporate treasurers:

“If we believe that rates  for corporates are likely to be low for many years, you ought to be testing projects at lower hurdle rates and which would still deliver decent value for shareholders.“

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CTMfile take: Corporate treasurers: Do you really need high hurdle interest rates for your projects?