Low Interest Rate Environments and Consequences

Tigran Kalberer

We have witnessed a decline in interest rates for some time, for both government bonds and swaps, especially in the stable developed economies – such as Japan, Germany, Korea, Taiwan, Switzerland and the Nordic countries – which in addition to enjoying political stability and robust economies also function as a safe haven for investors from more unstable jurisdictions. The interest rates in these countries have become negative, in Switzerland even for bonds with a term over 20 years.

There has also been a decline in interest rates in the eurozone, but for other reasons, mainly the European Central Bank (ECB) actively fighting economic contraction caused by lack of reforms using monetary tools at their disposal. This fight will be won, but only if the time bought by these monetary actions is used wisely to implement further reforms and the debt crisis is addressed with robust measures. Otherwise, economic contraction will probably lead to an inflationary shock.

Of course, such an economic environment causes uncertainty, volatility and political instability. In theory, it should also provide an ideal setting for increased demand for life insurance products. However, the low