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Real Interest Rates: Past and Future

Published online by Cambridge University Press:  26 March 2020

Maurice Scott
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Abstract

Before 1914 long-term price stability was confidently expected in the UK. The typical yield then of 3 per cent per annum on long-term UK government bonds can be compared with the 4 per cent per annum on government index-linked bonds at end-1992. Inflation has made conventional long-term Government bonds riskier, and it is estimated that the real expected yield on these was about 5 per cent per annum at end-1992. Estimates are also provided for years in between, and for expected real returns on equities, and for the US, and these may surprise some. As estimated, expected real long-term UK government conventional bond yields were mostly at or above 4 per cent per annum. As bonds became relatively more risky, the risk premium on equities came down and is currently quite small, so that the cost of equity capital has not risen as has the cost of government conventional bond borrowing. In the absence o f a prolonged world depression, it seems likely that current expected real long-term interest rates will not fall, and could go higher.

Type
Articles
Information
National Institute Economic Review , Volume 143 , February 1993 , pp. 54 - 71
Copyright
Copyright © 1993 National Institute of Economic and Social Research

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Footnotes

The Review is pleased to give hospitality to CLARE Group articles, but is not necessarily in agreement with the views expressed; responsibility for these rests with the author. Members of the CLARE Group are M.J. Artis, A.J.C. Britton, W.A. Brown, C.H. Feinstein, C.A.E. Goodhart, J.A. Kay, R.C.O. Matthews, D. Miles, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent, M.FG. Scott, Z.A. Silberston, J.H.B. Tew, S. Wadhwani and M. Weale.

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