Interest rates can be too low

The commentariat is predicting another drop in the official cash rate to counter the economic slow-down in the wake of COVID-19, but Kiwibank’s chief economist Jarrod Kerr has a better idea:

“What we need right now is targeted fiscal policy rather than monetary policy and I’d say if we’re sitting here and the Reserve Bank is forced to cut 50 basis points, that’s because the government hasn’t done enough on the fiscal side,” he told Morning Report.

Interest rates are already at historically low levels. A further drop is unlikely to stimulate business spending but it could add fuel to housing inflation which is not what we need.

Low interest rates bring other downsides.

Reports on changes to interest rates are usually written from the point of borrowers for whom lower is better and higher is worse.

For lenders the reverse is true.

If inflation is low too, the real value of their capital will be maintained but interest rates can be too low for savers, especially if they are depending on the return from their investment for all or most of their income.

Low interest rates can also be a disincentive for business succession.

A business broker told me that several potential clients looked at what they were getting form their business, worked out what they could sell them for and the return they’d get if they invested that in interest-bearing accounts, and decided the income gap would be too big for them to sell.

Low interest returns are already hurting savers and would-be retirees, another drop in rates will compound that and do little if anything to stimulate the economy.

The government must look in its fiscal toolbox rather than leaving it to the Reserve Bank and monetary policy.

One Response to Interest rates can be too low

  1. adamsmith1922 says:

    Reblogged this on The Inquiring Mind.


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