Global Economy Shifts Towards Higher Interest Rates Amid AI-Driven Growth

The global economy is experiencing a shift in interest rates as governments and central banks respond to rising growth, business borrowing, and investment. The 'neutral' rate, which brings economies to equilibrium, appears to be increasing. Real inflation-adjusted yields are driving the latest move, not expectations of inflation itself.

In the past three months, real U.S. 10-year rates have surged by about 40 basis points, while Japanese and French 10-year real rates have also risen significantly. This suggests that governments and central banks may need to raise interest rates further to match the growing economy.

Federal Reserve Chair Kevin Warsh acknowledged this in a recent speech at Jackson Hole, stating that current U.S. monetary policy has little effect on loan or credit growth, with financial conditions remaining loose. He emphasized that the Fed 'has work to do' unless inflation subsides toward its 2-per-cent target.

The Organisation for Economic Co-operation and Development reported last week that G20 goods trade accelerated in the second quarter, driven by AI-related chips and computing equipment. This suggests that the global economy is being boosted by the AI capital-expenditure boom, which may continue through next year.