Why are interest rates so low?

Why are interest rates so low?

At its meeting on 10 March 2016, the European Central Bank cut key interest rates further. Banks are currently paying 0% to borrow from the ECB. If, at the end of the day, they have any money left which they have not lent out, they have to deposit it in the ECB account, where they pay a punitive interest rate of 0.4%. In this way, the ECB forces banks to lend to the full. 

Why does the ECB do this?

Through ultra-low interest rates and a series of other measures, the ECB has managed to avoid a severe economic depression. Lower interest rates have encouraged families, and later also companies, to start borrowing and consuming again. This is what got the economy back on track. We are aiming for solid growth of around 1.5 percent for the euro area for 2016.

However, this is not enough for the ECB. Inflation currently stands at 0%, and the ECB wants it to rise to 2%. This is the ideal percentage for a healthy economy. The question is therefore whether the ECB should be making more of an effort.

How can we achieve more growth?

Cutting interest rates below 0% would have little impact on the economy. Governments also have to do their bit.

The current low interest rates are making space in the budget. This is because less interest has to be paid on high government debt. Governments can therefore save less to achieve their budget goals. This, in turn, offers the possibility of taking measures to improve the economy.

A good example of this is investment in infrastructure, such as roadworks. This immediately boosts growth, as the money spent goes straight into the economy. It also leads to a structural increase in growth in the long term, because there are fewer traffic jams. We must now hope that the various governments will set their minds to this.

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