Philip R Lane: Determinants of the real interest rate

Remarks by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the National Treasury Management Agency, Dublin, 28 November 2019.

Introduction

It is a pleasure to address the Annual Investee and Business Leaders' Dinner organised by the National Treasury Management Agency (NTMA).I plan today to explore some of the factors determining the evolution of the real (that is, inflation-adjusted) interest rate over time.

This is obviously relevant to the NTMA in its role as manager of Ireland's national debt and also to its other business areas (Ireland Strategic Investment Fund; State Claims Agency; NewEra; National Development Finance Agency) and related entities (National Asset Management Agency; Strategic Banking Corporation of Ireland; Home Building Finance Ireland). More generally, the real interest rate is at the core of many financial valuation models, while simultaneously acting as a fundamental macroeconomic adjustment mechanism by reconciling desired savings and desired investment patterns.

My primary focus today is on the real interest rate on sovereign bonds, which in turn is the baseline for pricing riskier bonds and equities through the addition of various risk premia. The real return on government bonds in advanced economies has undergone pronounced shifts over time.