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Low interest policy

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low interest rate policy

Much is written in the media about the current low interest rate policy.

However, very few people know who is pursuing this policy and what is the idea behind it. There are arguments for low interest rates and a “policy of cheap money” – however, criticism is also voiced time and again.

Was bedeutet Niedrigzinspolitik?

Low interest rate policy is pursued by a central bank. Either the European Central Bank (ECB) or the central banks of the USA (Fed) or Great Britain, Japan or Switzerland can be considered.

In general, of course, other countries also have central banks, some of which pursue different policies, but are also considered less “stable”.

At the end of 2019 key interest rates in the EU were 0.00 percent, in Switzerland and Japan even negative interest rates were called (minus 0.75 percent and minus 0.10 percent) and also the Bank of England and the Federal Reserve in the USA pursue a clear low-interest policy with 0.75 and 1.75 percent respectively, which also applies to Australia, Canada and New Zealand. In China, the key interest rate is 4.35 percent, while Brazil and India have five and 5.15 percent, respectively, and Russia even 6.5 percent.

This shows that a low-interest policy is at least not without alternatives.

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What is the purpose of the low-interest policy?

But why are interest rates so low in some economies?

The answer lies in the expected positive effects on the economies. The train of thought is clear: the cheaper the money, the more likely it is to be invested, because after all it costs almost nothing to borrow money.

In addition, the interest rates that have to be raised for national debt are low and the public sector has greater scope for investment. This even goes so far that some people talk about helicopter money, which would mean an expansion of the money supply and distribution to the citizens.

What are the advantages of low interest rate policy?

The advantages of a low-interest policy, however, are first and foremost theoretical, because an investment is only made when it is worthwhile and not simply because of low interest rates. Conversely, a company might also be willing to pay interest if the capital could be invested profitably.

The low interest rate policy offers an advantage for all those who buy real estate and are in debt for it. Never before have interest rates been so low and even personal loans can be easily obtained and paid off with low interest rates.

However, it must be ensured that the interest rate level can rise at any time. Who sits then still on a mountain of debt, can be overtaxed by this fast.

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Disadvantages of the low interest rate policy

The traditional investors are again disadvantaged by the low interest rate policy.

It is a fact that virtually no interest is paid on fixed-term deposits or savings books and that classic life insurance policies also have considerable problems.

However, the phenomenon of low interest rates also affects private health insurers, whose reserves are growing more slowly, as this money also has to be invested securely and at a fixed rate of interest.

Crowdinvestments, for example, offer alternatives for the investment of money, with which noticeably higher interest rates are worked with and entrepreneurial acting is still rewarded.

Another way of defying the policy of low interest rates is to buy shares, although here one has to cope with the fluctuations of the stock markets.

Forecasts on low interest rate policy

At least for the ECB, no turnaround in interest rates is expected in the coming months.

Most experts agree that President Christine Lagarde, who has been in office since November 2019, will continue on the path taken by Mario Draghi.

The low interest rate policy began in the wake of the financial crisis of 2008. The fact that monetary policy was handled extremely loosely made it possible to defy the distortions in the market. The ECB’s main objective is price stability, which by its very nature can only be achieved if interest rates do not skyrocket.

Institutions such as the Bank for International Settlements (BIS) and others are now also voicing criticism. The problem with a low-interest policy is also that in times of recession it is no longer possible to set fiscal policy impulses, or to put it another way: Interest rates that are already at zero can hardly be lowered.

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