(Nov 30): Global interest rates will likely sink back to the lows seen before the pandemic in the long run, according to a new Bank of England (BOE) study that wades into the fierce debate among economists about the future of borrowing costs.

Staff analysts at the UK central bank argued that sluggish productivity gains and longer life spans will drive the long-run neutral interest rate — known as R* by economists — back down to the historically low levels that prevailed in the years leading up to the pandemic.

The conclusions feed a growing debate over whether the ultra-low rates environment that emerged after the financial crisis will return. A jump in inflation after lockdowns ended forced central banks around the world to tighten policy quickly, forcing up borrowing costs.

“Our simulations imply that increased longevity and slowing productivity growth have resulted in a large fall in Global R*,” said the blog post written by three BOE staff members — Ambrogio Cesa-Bianchi, Richard Harrison and Rana Sajedi. “The global rise in longevity is not expected to unwind, and so its effect on Global R* is expected to persist.”

None of the BOE’s policy makers led by Governor Andrew Bailey were named contributors to the piece.

There’s disagreement among economists about whether an aging population will increase or pull down interest rates. Some argue that green investment and deglobalisation will push up borrowing costs in the long term.

Blackrock, BOE ratesetter Megan Greene and former BOE economist Charles Goodhart are among those to argue that the neutral rate has risen.

The BOE staff said that global R* dropped by more than three percentage points since the peak in the mid-1970s. They said long-run interest rates are likely to remain low unless there’s a reversal of productivity and demographic trends or new economic forces.

Bailey said earlier this month said that drivers for the neutral interest rate for the long run and short run were pointing in different directions. In the long term, an ageing population indicated we are “going back to low rates”, he said.