Negative Real Interest Rates... Where Is the Flow of Money Headed?

[Asia Economy Reporter Ji Yeon-jin] As U.S. interest rates rise sharply, attention is focused on the flow of funds. Amid the ongoing trend of interest rate inversion or narrowing gaps between the U.S. and major countries, it is noteworthy whether global funds will concentrate in the U.S. at the early stage of the U.S. base rate hike.

According to a report published by KB Securities on the 16th, as U.S. interest rates rose sharply, the interest rate gap between the U.S. and Japan widened by nearly 100 basis points in just over a month since early March. The interest rate gap between the U.S. and China inverted, and the gap between the U.S. and South Korea also narrowed.

However, the real interest rate, calculated by subtracting consumer prices from U.S. Treasury yields, recently dropped significantly to -6.2%. This situation is similar to the mid and late 1970s. Although Treasury yields continued their steep rise, inflation increased even more sharply, resulting in negative real interest rates.

At that time, global funds flowed to countries with relatively stable inflation rather than the high-interest U.S. market. Judging by the preference for U.S. assets, when real interest rates fell into negative territory, the dollar weakened, and capital tended to flow out of the U.S. The concentration of funds in the U.S. began after inflation stabilized and real interest rates turned positive. KB Securities researcher Kim Hyo-jin stated, "Considering that the nominal U.S. interest rates actually began to decline at that time, real interest rates compared to inflation were the key variable determining investment in the U.S. rather than nominal interest rates."

Although U.S. consumer prices rose 8.5% year-on-year in March, the core inflation trend has slowed. Therefore, considering the decline in gasoline prices since April, the view that inflation has peaked is gaining traction. However, while the U.S. inflation rate is expected to gradually decrease, it is anticipated to remain higher than other countries toward the end of this year and next year.

While wages in European countries remain at pre-pandemic trends, U.S. wages significantly exceed pandemic trends, suggesting that U.S. inflation will continue at a higher level than in Europe and other countries. Researcher Kim said, "Considering U.S. wages and other factors, U.S. inflation will remain at a relatively high level compared to Europe and other major countries for a considerable period," adding, "Global funds are more likely to turn their attention to countries with stable inflation rather than flowing into the U.S. chasing nominal interest rate hikes."

Although capital outflows and currency depreciation may continue for a while in South Korea, China, and other countries due to the rapid U.S. rate hikes, the possibility of large-scale or prolonged capital outflows is low.

This content was produced with the assistance of AI translation services.