Why robots mean lower interest rates

Technological progress will affect inflation, says Axel Weber, chairman of UBS Group

If robots rise, interest rates will fall.

That was the assumption of delegates at the World Economic Forum's annual meeting in Davos, Switzerland, as revolutions in automation and artificial intelligence reshape how economies work.

The argument goes like this: As machines become more and more advanced, many workers will lose their jobs and others will see their wages fall. New technology will also increase the chances of a 1990s-style jump in productivity. Those forces will combine to restrain prices across the world, meaning that the era of slow inflation now challenging central bankers may only prove a sign of things to come.

"Technological progress will put a lid on how inflation can re-emerge," Axel Weber, chairman of UBS Group, said in Davos. The worry is that the so-called fourth industrial revolution will hurt an increasing share of the labour force, generating unemployment and putting pressure on wages and therefore consumption.

The Forum calculated more automation means over 5 million jobs will be lost by 2020 in 15 major developed and emerging economies. That prospect is already unsettling voters around the world, disrupting politics and fanning support for populists from Marine Le Pen to Donald Trump.

"The first effect is lower wages for those people who are replaced," said Adam Posen, a former Bank of England policy maker who now runs the Peterson Institute for International Economics in Washington. "That should adjust over time, but the initial impact is deflationary."

By making the remaining workforce more efficient, optimists are banking on a productivity boom akin to when the Internet age helped propel a 3.5 percent rate of productivity growth in the US from 1996 to 2003, allowing central bankers to keep rates lower than otherwise. Bank of America calculates the adoption of robots and artificial intelligence could boost productivity by 30 per cent in many industries.