In focus

What do low interest rates mean for future returns?

Interest rates on cash and government bonds are key building blocks in the return assumptions used by long-term investors. If we assume these rates are going to be low for the foreseeable future, it drags down expected returns across the board.

Consider a portfolio of developed market equities. Our long-term historical data indicates that they generate a return of 4.75% every year above the interest rate on cash. An assumed cash rate of 1% will result in a very different overall return from a rate of 2.5%, which was the approximate level of US deposit rates before the pandemic.

There is another factor to consider. Equity market returns have been very strong over the past year, leaving many valuations higher than their long-term average. Robust earnings growth this year should help, but history shows  that valuations tend to revert towards long-term levels. Return expectations over the medium-term may need to come down another notch.

Actual returns in any given year may well be very different from our expected returns based on long-term assumptions.

Webinar: Why we think the recent inflation spike is temporary – and the outlook for interest rates



  • We still see the ongoing spike in inflation as temporary. The real driver of inflation is wages. And with plenty of slack in the labour market, we think wage increases will remain under control.
  • We see the Federal Reserve slowing its bond purchases later this year and starting to raise interest rates in 2022. We don’t expect the UK to start raising interest rates until 2023.
  • High debt levels mean that interest rates will have to rise slowly and remain relatively low.
  • Debt-to-GDP in advanced economies is now at the highest level since World War Two, when it was bought back under control through years of austerity. Policymakers are now much more wary of austerity.
  • In advanced economies, government budgets will improve over the next few years – but are likely to remain in deficit. As a result, the stock of government debt will continue to rise.
  • The low cost of debt is keeping the show on the road. In fact, despite the ever-increasing debt load, very low interest rates mean interest payments  have fallen. 
  • Investors will be very focused over the coming months in assessing whether the rise in inflation will be more or less transitory – and what it means for interest rates.

Managing wealth in an era of low interest rates

Markets are worried about the return of inflation and, in turn, higher interest rates. Unlike some, we believe low rates will remain a defining feature of markets in the years ahead. This has important implications when it comes to investing your wealth.

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This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Contact Cazenove Capital

To discuss your DFM requirements, or to find out more about our services and how we can help you, please contact:

Nick Georgiadis

Nick Georgiadis

Head of DFM Team
Simon Cooper

Simon Cooper

Business Development Director