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How Do Pandemics Affect The Path Of Interest Rates?

2023-09-15, Jason Reed

In a recent paper, “The Long Economic Hangover of Pandemics,” authors Jordà, Singh and Taylor studied major pandemics of the last millennium. Here we explore their findings. Will interest rates in a post-Covid era resemble patterns identified from past pandemics?


Pandemics are deadly for people but leave capital resources undisturbed. Capital investment then declines in post-pandemic periods due to the surplus of capital per worker. Jordà, Singh and Taylor found that real (net of inflation) interest rates consequently decline by an average 1.5 percentage points over twenty years following a pandemic, and then take another twenty years to fully recover. In contrast, the destruction of infrastructure and machinery during wars increases the need for subsequent capital investment, causing interest rates to rise and stay elevated for decades.

Note – Shaded regions represent standard deviation bands
Source: Source: Jordà, Singh, and Taylor (2020).


The Black Death (also known as the bubonic plague) claimed an estimated 75 to 200 million people, including one-third of all Europeans. The 1918 flu pandemic killed over 100 million people. In comparison to these super pandemics, Covid has been significant, but much less devastating. It’s important to note, however, that Covid may still pose a global threat.

Unless the Covid pandemic worsens, it is conceivable that its macro-economic impacts may be milder than the historical average.


Exceptional policy measures were implemented to mitigate the economic repercussions of the Covid pandemic, which may also lessen the economic hangover. Central banks reduced interest rates to zero, while government fiscal agencies provided emergency financial assistance to individuals and businesses. These measures helped alleviate the economic stagnation that might have otherwise occurred.


There was a great deal of forced savings early in the Covid pandemic because opportunities for spending were restricted. The total stock of savings also exploded higher due to the fiscal interventions discussed above.

But it doesn’t appear that people are maintaining a more cautious approach to savings, as one might expect following a disaster. This could be a moral hazard resulting from helicopter money early in the pandemic. The chart below from the Federal Reserve Bank of San Francisco indicates that accumulated excess savings have been almost entirely spent.

Source: Federal Reserve Bank of San Fransisco


Although interest rates initially cratered in the early days of the pandemic (as predicted by historical data), they’ve since soared in reaction to burgeoning inflation. Now that interest rates have adjusted, where do we go from here?

History suggests that central banks could be making the mistake of keeping interest rates too high for too long. If high interest rates push the economy into recession, lower rates are typically needed to help it out.

How many people are predicting that interest rates will fall back to more comfortable levels and stay there? That’s what many indebted homeowners are hoping for, but it would be risky to be fully committed to that view.

There are several factors that could keep interest rates higher for longer. Capital spending could be on a multi-decade uptrend due to investment in renewables, as well as investments to make supply chains more robust.

As discussed above, the most important determinant for the path of interest rates might be government interventions that cause more harm than good. Ultimately, there is a danger that free money creates dependence on even more free money down the road. If the solution to the next major recession is even more fiscal stimulus, we could face an alarming rise in inflation, as well as higher interest rates needed to fight inflation and to finance exploding government deficits.


The path of interest rates is unclear because there are both deflationary and inflationary factors at work in the economy. Rather than estimating probabilities of what might happen, a more constructive approach is to assess your personal risk profile. Consider which scenario would have a more significant impact on you: rising or falling interest rates. Once you’ve identified your vulnerability, you can then contemplate actions to protect your wealth and potentially capitalize on opportunities. Reach out to your Investment Counsellor to discuss this further in the context of your unique situation.

All views and projections are the expressed opinion of QV Investors Inc. and are subject to change without notice. This Update is provided for informational purposes only. QV Investors takes no legal responsibility from any losses resulting from investment decisions based on the content of this Update.


Jason Reed | Investment Counsellor

Jason builds relationships and draws from his nearly 25 years of investment experience to help clients implement personalized investment strategies.