Savers, pension funds and insurance firms are facing a gloomy outlook as real interest rates are expected to rise only modestly in the coming years, the International Monetary Fund warned in its economic outlook.

Although the low rates are good news for borrowers, they may also put constraints on monetary policy, the report said, if risks of very low growth in advanced economies materialised. It could also push investors into riskier moves in search of better returns.

According to the IMF, real interest rates worldwide are expected to increase in the medium term as economic conditions return to more normal levels, but high real interest rates are unlikely to re-emerge.

“Part of the reason is cyclical: the extremely low real rates of recent years reflect large negative output gaps in advanced economies,” the IMF said. However, it found that real rates and the cost of capital are likely to remain relatively low even when output gaps are closed.

It said a shift towards safer assets seen in recent years was not expected to reverse, while a fall-off in investment rates in advanced economies, due to the global financial crisis, was likely to persist in the coming months.

Asian countries
It also noted the higher rate of savings in Asian countries due to a steady increase in income growth during 2000 to 2007, and although growth in emerging market economies will be lower in the medium term, the effect on real interest rates is still expected to be modest.

“There are no compelling reasons to expect that long-term real interest rates will quickly return to the average level of 2 per cent observed during the mid-2000s,” the IMF said.

It warned that a protracted period of low real interest rates would have negative implications for those pension funds and insurance companies that had defined-benefit obligations.