Monday, February 29, 2016

Lower interest rates not necessarily linked to consumer spending

It is the view among most central bankers that you cut the interest rate and the economy will respond positively. But that is far from certain.

First of all, interest rates provide savers income. So, if you have zero interest rate the savers, the insurance industry, pension funds are being hurt. That should be very clear.

Number two, if I came to you and say: Look, interest rates are going to go below zero and on your deposits you don’t get money any more, the reaction of you would be to spend more. But, it could also be that you would save more because say on a million dollar before you got an interest of 10 per cent and now that you get nothing and that lowering of interest rate has actually led in the case of Denmark, Sweden, Switzerland and Finland to actually higher savings rate.

In other words, people feel insecure. The household scratches its head and says what is happening? I am not getting any money in my retirement and so I have to save more. So, the view that lower interest rates stimulate growth is very questionable.