Issue Two of the four scenarios imply structurally higher interest rates

Summary

MGI stresses a point of particular importance for business leaders: two of its four scenarios for an elevated balance sheet would probably bring structurally higher interest rates. In productivity acceleration, stronger business investment would raise the demand for capital and keep rates above prepandemic levels, even as inflation moves closer to US and European targets. In sustained inflation, central banks would likely tighten policy rates, eventually pushing long-term yields up as inflation stays above target. By contrast, a return to secular stagnation would mean below-target inflation and real interest rates under 1 percent, possibly negative, and a balance sheet reset would see a spike in rates followed by a fall toward zero. The report therefore urges executives to prepare for an unusually wide range of economic pathways.