FRANKFURT (Reuters) - The rapid ageing of Europe's population may keep interest rates depressed over the next decade, potentially limiting the European Central Bank's ability to adjust policy, a research paper published by the ECB on Wednesday showed.
The expected rise in the share of people not working will hold back growth and limit investment, making it necessary for governments to encourage later retirement, and to promote innovation and investment, the researchers said in a paper that does not necessarily represent the ECB's opinion.
"Empirical evidence presented in this paper suggests that over the next decade, adverse demographic developments in the euro area may continue exerting downward pressure on short- and long-term nominal and real interest rates, potentially limiting the ability of monetary policy to adjust its stance due to the presence of the lower bound to policy rates," the paper said.
With ECB rates at record lows, policymakers have relied on a plethora of unconventional tools to boost growth and prices but some have argued that rapid ageing, technological leaps and globalization naturally cap wages, prices and ultimately central bank interest rates.
"In (the baseline scenario,) the real short-term interest rate in the euro area would remain negative until 2019 and remain close to zero over the 2020-25 period, not far from the average between 2007 and 2015," said the authors, from the ECB and the Bank of Italy.
DECLINING PACE OF INVESTMENTS
Using projections in the European Commission's 2015 Ageing Report as the baseline, the paper also concluded that real GDP and investments would grow by less than 1 percent per year.
Short-term interest rates would only rise above 1 percent by 2025 if the euro zone managed to maintain its current dependency ratio, or the ratio of people under 15 and over 64 relative to the working-age population, an optimistic scenario based on current projections.
The European Commission projects this dependency ratio to rise from 53 in 2013 to 60 by 2025 and 77 by 2060, which would mean that for every 100 people at work, there would be 77 either younger than 15 or older than 64.
The Commission projections also shows that the bloc's population would barely rise over the next half of a century but the working age population would drop rapidly as life expectancy increases.
To read the paper, click on: https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2088.en.pdf?a57bbd3d0a399178f5f9c03a1c4d33d3