AI supercycle reshapes global interest rates

Allianz Trade has released an analysis examining the impact of artificial intelligence (AI) on global interest rates. The report forecasts that the AI supercycle will lead to lower long-term interest rates in both the United States and Europe.

According to the study, AI's influence on rates is transmitted through five channels: changes in the neutral rate, inflation expectations, and fiscal collateral, alongside AI-driven duration supply and crowding-out effects. The specific reasons and pathways for lower rates differ significantly between the US and Europe.

In the US, the realization of AI's productivity potential is crucial for maintaining the country's fiscal trajectory. In Europe, interest rates are expected to decline even with a smaller growth impulse from AI, as its fiscal position does not require the same level of adjustment. The US rate trajectory is described as more leveraged and volatile, while Europe's is seen as more stable.

The market has reportedly already priced in the productivity gains from AI for the US, but not the accompanying fiscal relief. Europe's situation is different, with its fiscal position benefiting more proportionally from AI-driven growth due to landing on a more stable debt path.