Fighting Over Low Interest Rates

European Central Bank Rates

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What's going on?

The European Central Bank (ECB) has faced some stinging criticism in recent months for its ultra-low interest rate policy (especially from German politicians and central bankers). On Monday, ECB President Mario Draghi provided a rebuttal

What does this mean?

The typical criticism of low interest rates is that it punishes people that have saved money (e.g. pensioners) because low interest rates produce very little income for them to live on. While Draghi agrees with this, he essentially said that there is no other option. The ECBs aim is that low interest rates lead people and companies to do more economically productive things (e.g. borrow money to build new factories). Draghi further argued (not for the first time) that governments must provide an economic boost by spending more money (for example, on building infrastructure like airports, bridges and power stations).

Why should I care?

The bigger picture: Its still not clear that ultra-low interest rates work. Major central banks like the ECB and the US Federal Reserve have kept interest rates extraordinarily low for almost eight years now – and economic growth has recovered somewhat but not in a big way. Most central bankers would say that more government spending would have helped considerably – which is quite likely true. The most recent data suggests that the European economy might be picking up. Hopefully, that proves correct because if its not, its unclear what else is going to drive economic growth in the future.

For you personally: Low interest rates have a HUGE impact on your life. They make it easier to take out a mortgage and therefore push up house prices. They also make it more difficult for people who are expecting to live off the income from their investments (for example, in retirement). Relatedly, they can push people into riskier investments (i.e. by implicitly encouraging people to target riskier investments that offer potentially higher returns). The good news, perhaps, is that a business loan might be a lot cheaper for you. These are just a few examples of the impact of ultra-low interest rates.

Originally posted as part of the Finimize daily email.

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