Historic Interest Rate Trends Collide with Modern War-Time Inflation

Interest rates have been rising rapidly due to inflation fears caused by ongoing wars in Ukraine and the Middle East. However, this recent trend is highly unusual according to centuries of interest-rate history.

A Bank of England study has analyzed over 700 years of data on interest rates in England, tracing back to 1317. The results show a strong downward trend in both nominal and real interest rates over time.

During major wars, real interest rates often become strongly negative as inflation exceeds the returns paid to savers. Today, financial markets are demanding positive real returns on government debt, which has profound distributional consequences.

Higher interest rates reward those who own financial assets while increasing mortgage costs and pressure on government spending, employment, and the wider economy.