Austerity keeps interest rates low, says study

LARGE budget deficits and growing national debts push up interest rates and leave countries more vulnerable to global economic shocks, according to new research out today.

While monetary and fiscal policies globally make the most difference to rates, a paper presented today at the Royal Economics Society argues individual governments also have an impact, with high-debt policies pushing up interest rates.

A one per cent increase in a country’s public debt is associated with a long-term interest rate rise of about one basis point, economists Sergio Sola and Salvatore Dell’Erba found.

Furthermore, a one per cent rise in the budget deficit increases sovereign spreads by 2.6 basis points.

“A global risk-aversion shock, generates an increase in sovereign spreads, which is higher for countries with a high stock of public debt or weaker political institutions – namely Italy.”