Interest rates and infrastrucure

SUMMARY

With the US Federal Reserve having embarked on monetary policy normalisation — albeit ever so gently — and the European Central Bank, and the Bank of England starting to follow suit, there is some unease that the performance of investments, including infrastructure assets, will be undermined.

Naysayers fret that what central banks giveth with unconventional monetary policy — negative real interest rates, and quantitative easing — central banks will taketh away with policy orthodoxy as economies achieve self-sustaining growth.

We part ways with pessimists as the impact of higher interest rates on infrastructure is complex and individualised. “Infrastructure” is a generic term covering myriad sectors and individual assets, each with distinctive dynamics and circumstances. Consequently, impacts will be equally varied.

In some cases, higher interest rates may be positive as asset owners will be compensated by pricing adjustments, or by exposure to macroeconomic tailwinds driving interest rates higher. But that’s getting ahead of ourselves.

How high might interest rates go is the first issue to address.

Read the full paper here.

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