Europe Economy

Interest Rates Will Rise Soon: Historian

Interest rates will have to rise soon even if major central banks – like the and the – keep monetary policy ultra relaxed for now, Niall Ferguson, Professor of History at Harvard University, told CNBC in an interview.

The Federal Reserve will issue a statement after its meeting on monetary policy later Tuesday but analysts do not expect it to announce the end of quantitative easing or to hint at interest rate rises like the European Central Bank.

"Even if interest rates actually stay where they are – which the optimists say they can for at least another year or so - the sheer volume of debt drives up the interest burden as a share of revenues," Ferguson said.

Earthquakeâ??s Fiscal Policy Effect
Earthquakeâ??s Fiscal Policy Effect

Interest payments make up about 10 percent of federal revenues currently but they are forecast to rise rapidly to 20 percent and in 10 year time, a third of all revenues will be absorbed by paying interest on the debt, he added.

"You can't just see nominal yields staying this low much longer, especially since the world is now in a much more inflationary situation than it was a couple of years ago," Ferguson said.

Paying so much interest on its debt will be a problem for the US especially since, unlike in Japan where 90 percent of the debt is held domestically, the US relies heavily on foreign investors to finance its debt, he added.

However, for Japan, the consequences of Friday's earthquake, combined with its ageing population, may make investors look again at the country's fiscal policy over the medium term, Ferguson said.

"Japan's ageing population has significant implications for its bond markets… as they retire they begin to draw down the savings that they accumulated during their working lives," he noted.

"I think what we see here is the kind of shock that historically often delivers the blow, that Black Swan. It's happened and it's going to have big implications not only, of course, for expenditure but also for revenue," Ferguson said.

"I do feel that this could be the moment when people start to reassess the viability of Japan's medium-term fiscal policy," he added.