Two years ago, at the end of the health crisis and before Russia's invasion of Ukraine, 10- and 20-year risk-free rates were negative. Today, they are uniformly above 2.5%. The 10-year rate differential between France and Germany was close to 30 basis points (0.3 percentage points). It is now around 60 basis points. So what has happened? What difference does it make? And what consequences can we draw from this?

The first explanation that springs to mind is obviously the rise in interest rates that began in the summer of 2022. The inflationary shock led central banks to raise their key rates, all the more precipitately because they had long believed that the surge in prices would be transitory. In the eurozone, the European Central Bank (ECB) rate rose from zero to 4.5% in just over a year. But this increase only affected overnight rates and, by spillover, rates for a few months. Such a sharp rise in 10-year rates cannot be explained by monetary factors, which are contingent by nature.

The explanation could be that the markets are anticipating a sustained rise in inflation. However, this is not the case: Despite the violence of the 2022 shock, the medium-term outlook for price rises has deviated only slightly from the ECB's target. Neither market expectations nor those of forecasters are currently substantially different from 2%. These are not the reasons for such a sharp rise in long-term rates. In other words, the reason for the rise in long-term rates is to be found in changes in the real economy.

A wave of concern

So what happened? To understand this, economists think in terms of the equilibrium real interest rate. Generally noted as "r*," this is the rate that equalizes savings and investment when the economy is operating at full capacity. It is a real rate that does not depend on inflation, but on determinants such as growth, demographics and the global balance between supply and demand for safe assets.

The difficulty is that r* is not directly observable. It can only be estimated indirectly, on the basis of long-term rates, an assessment of expected inflation and an informed judgement of the state of the economy. This does not prevent it from playing an important role in the conduct of monetary policy. In the same environment of inflation expectations, the same key rate does not have the same impact depending on whether the equilibrium real rate is zero, negative or, on the contrary, close to 2%.

Before the 2022 shock, a certain consensus had formed around the idea that the equilibrium real rate had fallen significantly since the 1980s, and that on the eve of the Covid-19 shock, it was certainly in negative territory. This led to a reassessment of the respective roles of monetary and fiscal policy.

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