This leads – again temporarily – to higher growth and more inflation. If, on the other hand, the central bank wishes to curb inflation, it increases its policy rate. I deliberately used the word ‘temporarilyֹ’ because if monetary policy were to target real interest rates below the equilibrium rate on a sustained basis, inflation would go on rising but this policy would not result in higher real growth in the long term. On the contrary, uncertainty about the path of inflation would reduce growth potential. This is one of the reasons why central banks are tasked with ensuring price stability. For this mandate to be fulfilled, the policy rate must be set such that, at the desired inflation rate, the real interest rate corresponds with the equilibrium rate in the medium term. It is likely that the real equilibrium interest rate is lower today than in the past. The case for this hypothesis is supported by the fact that real interest rates have been falling globally for a 1  In fact, there are several possible definitions. The ‘ex ante’ real interest rate is the nominal interest rate less expected inflation. The ‘ex post’ real interest rate is the nominal interest rate less the effective inflation rate. Page 3/16  considerable time because, it is argued, people are investing less and simultaneously displaying a greater propensity to save. The propensity to save is increasing due to population ageing.
This demographic trend can be measured using the old age dependency ratio, which measures the ratio of people over 64 to the working age population. An ‘older’ population has a higher old age dependency ratio. Chart 3 shows that the old age dependency ratio in Switzerland, as in many other countries, is rising. Pensioners live off their savings. And an ageing population needs to save more today in order to be able to finance a specific level of consumption in the future. Another cause of the increased supply of savings is the integration of China into global financial markets. Savings in China are high as a result of its ageing society and its rudimentary state pension system. In the current economic situation, uncertainty regarding the future development of the economy in certain parts of the world may also have pushed up the supply of savings. While the propensity to save has increased, the willingness to invest may also have fallen. On the one hand, this may once again reflect heightened uncertainty over future economic conditions. On the other, expectations of lower productivity growth might also be playing a role. Furthermore, industrial economies are being transformed into service economies, with potentially lower capital needs. All these factors have resulted in a relatively low real equilibrium interest rate today – across the world, and thus also in Switzerland. Moreover, global monetary policy is expansionary due to undesirably low inflation and subdued economic growth in the wake of the financial crisis.