J.P. Morgan Warns of Rising Interest Rates Due to Demographics and Debt

J.P. Morgan has warned that global interest rates are poised to increase by the end of 2026, primarily due to two significant factors: dwindling populations and a breakdown in fiscal discipline. The financial institution's analysis, detailed in a recent note, identifies "six D's" shaping the global economy, with deficits and de-population being the key drivers of upward pressure on borrowing costs. The IMF reported in 2025 that global debt had reached $251 trillion across companies, households, and countries, highlighting a substantial financial burden.

Regarding deficits, J.P. Morgan's research team points to a "global breakdown in fiscal discipline" occurring worldwide, where fiscal dominance is overshadowing monetary policy. Global public debt has now reached $100 trillion, which constrains fiscal space and contributes to rising interest rates. The theory suggests that expanding national debt can erode government creditworthiness, potentially leading to inflation as central banks might increase the money supply to devalue the debt. Governments have relied heavily on fiscal stimulus, such as increased spending or tax cuts, particularly during recent crises like the Iran crisis, according to the IMF's World Economic Outlook. These actions have led to increased deficits or reduced government revenue without clear compensatory measures, hindering the rebuilding of fiscal space.

Fiscal space refers to a government's capacity to increase spending or reduce taxes without compromising its financial stability. J.P. Morgan specifically notes that in the United States, a larger debt stock combined with higher interest rates and a lack of political will for fiscal consolidation suggests an increase in the term premium. The term premium represents the additional return investors expect for holding long-term debt. The "demographic dividend of the last 40 years is ending," according to J.P. Morgan, implying that the shrinking workforce and aging populations will further exacerbate these economic pressures and contribute to higher borrowing costs globally.