Ageing population to keep interest rates high for years to come

Ageing population
Ageing population

Ageing demographics and rising protectionism will keep inflation high for years to come, fund managers have warned.

Money managers are bracing for a world with structurally higher inflation, marking a permanent departure from the years of ultra-low rates after the financial crisis.

This will have profound implications for governments that have vastly increased their debt levels in the wake of the pandemic and the energy crisis, they said.

Frédéric Leroux, a fund manager at French asset management firm Carmignac, said it was already clear that ageing populations were pushing up inflation in rich countries.

Mr Leroux said: “Demographics has been very disinflationary for 30 to 40 years. Now it is turning inflationary and that is an important message.”

As the number of old people relative to those of working age rises this will worsen labour shortages and push up wages, Mr Leroux said.

Greyer workforces are also more vulnerable to shocks, he added, highlighting the drop off in labour force participation in the UK and US after the pandemic amid a rise in early retirement.

Mr Leroux said: “When you are close to retirement, the participation rate of this age cohort can come down very quickly.”

It comes as traders over the past week again have pushed back rate cut expectations on both sides of the Atlantic, after it emerged that US inflation rose by more than expected in March even as borrowing costs have been at a 23-year-high for nearly a year.

Mr Leroux said: “When you look at the US economy today you see no reason why rates should be lowered.”

Ihab Salib, head of international fixed income at $758bn asset manager Federated Hermes, said his working assumption was also that inflation and rates will stay higher than in recent years.

Mr Salib said: “There are longer-term factors which have brought inflation down since the 80s and rates with it – technology, China, whatever you want to highlight – some of these factors are shifting. So [consumer price rises are] going down, but not to the cycle that was in place prior to the recent bout of inflation, I don’t see us going to that level again.”

He warned many debt-bloated governments would face tough choices as a result.

Mr Salib said: “They’re in trouble. Most government debt has risen so much because financing levels were so low for so long. In practically any economy or any part of the world, the ability for governments to maintain their debt at this higher funding level is going to be very difficult.”

The Congressional Budget Office in the US has warned that government debt is on course to rise from 97pc of GDP last year to 116pc by 2034, higher than even during the Second World War.

In the UK, debt levels are at their highest since the 1960s.

Markets were pricing in as many as six rate cuts in the UK at the start of the year. However, after last week’s movements, they are now only expecting two.