interest rate


The trend in global interest rates often seems volatile when considered over a relatively short period. However, when you look at graphs going back hundreds of years, there is a distinct trend. There are intermittent peaks and troughs, prompted by significant economic and political events. Going back 700 years, the trend in global interest rates has been downwards.

What is the central bank rate?

There are several variations in terminology used to describe the central bank rate. It is often referred to as the bank rate or the discount rate. In simple terms, this is the interest rate which central banks charge commercial banks on loans and advances.

Historic central bank discount rates

The USA is seen as the financial powerhouse of today. However, the location of leading financial centreshas changed over the years. The following graph gives an interesting illustration of central bank rates over the last 500 years using the following measurements:

  • Bank of St George in Genoa deposit rate between 1522 and 1625
  • The legal limit on English loans between 1625 and 1692
  • Bank of England discount rate from 1693 to 1913
  • Federal Reserve Bank of New York discount rate from 1913 to 2002
  • Federal Funds Target Rate since 2003
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While peaks and troughs on the graph below standout, the central bank rate has generally fluctuated between 2% and 4% over the last 500 years. We have seen wars, depressions and periods of boom and bust, which have led to significant highs and lows in the deposit rate. The most prominent troughs relate to:

  • Multiple wars in the 1600s
  • The aftermath of World War II
  • The US depression of the 1930s
  • Decade-long economic depression from 2008
  • COVID-19 pandemic

There have also been numerous peaks in the central bank discount rate over the last 500 years. However, the boom and bust period of the early 1980s led to exceptionally high inflation and double-digit interest rates. Central banks were forced to increase borrowing rates to reign in excessive consumer spending, which was fuelling inflation.

Historic government bond yields

While central bank rates are a fairly basic indicator, government bond yields also take into account inflation and the risk of default. As we touched on above, the prominent financial centres of the world have changed over the years. The following graph has been produced using:

  • Prestiti of Venice from 1285 to 1303
  • Consolidated bonds of Genoa between 1304 and 1408
  • Prestiti of Venice from 1408 to 1500
  • Juros of Spain between 1504 and 1518
  • Juros of Italy between 1520 and 1598
  • Government bonds of the Netherlands between 1606 and 1699
  • English bonds from 1700 to 1918
  • United States 10 year bonds from 1918 onwards
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There are several prominent factors to take into consideration with the graph below:

  • Italian government bond yields have been volatile due to expensive wars
  • The risk of default has virtually disappeared since the switch to the Netherlands government bond rate
  • The reduced risk of default on government bonds has left inflation as the primary external driver
  • More recently inflation has been relatively low, leading to relatively low government bond yields

Many people automatically look at the headline interest rate on government bond yields, which is experiencing a downtrend which began in the 1600s. The key is to look at the real interest rate, which takes into account inflation. In light of the 2008 US mortgage crisis, and the resulting worldwide recession, together with the economic challenges of COVID-19, some short-term government bond rates have turned negative. There has been ongoing talk of leading central bank rates falling below zero to encourage consumers and businesses to spend and invest. On the whole, central banks and governments around the world can control inflation rates much better these days. This has led to a reduction in headline interest rates, but the key is to look at the real interest rate, headline rates less inflation. Investors looking towards government bonds during the COVID-19 pandemic focused more on the security of the capital as opposed to the income derived.

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Many would argue that the worldwide recession, prompted by the 2008 US mortgage crisis, ended in 2013. However, many countries are still feeling the financial after-effects. The added expense of supporting economies during the COVID-19 pandemic has decimated government balance sheets. While interest charges on government debt are relatively low in the context of historical rates, it will take many years to repay the loan principal. Savers have been discouraged from saving, and investors are faced with volatile stock markets, with consumers and businesses encouraged to borrow and spend.