What Are The Limits Of Low Rates?

 What Are The Limits Of Low Rates?

Against all expectations, the fourth quarter of the year announces a further drop in mortgage borrowing rates to reach an average of 1.17%. To reach this low level, it is useful to ask a few questions to find out if this improvement will last a few more years?

Why Pursue A Low Interest Rate Policy?

When a central bank engages in a low interest rate policy, it seeks to encourage consumption and borrowing to boost the economy of its sector. In general, to restore market confidence the central banks reduce the cost of borrowing jointly with the states that inject liquidity.

Since 2012, the European Central Bank (ECB) has constantly manipulated its main key rates to support high risk merchant service. In this context, the owners gave themselves to their heart since the stone market has regained a certain vigor. Indeed, at the same time real estate prices are going up again. This is what we see in the behavior of borrowers who cushion the rise in the price per square meter by extending the duration of their loans, thanks to lower rates.

Most economists note that this strategy has borne fruit, particularly for the countries of the South which suffered greatly from the economic crisis of 2008. However, this recovery to normal seems to lead to a dead end because despite extremely low rates, some experts see afar, the risk of a systemic recession. Indeed, if inadvertently the growth sky of the euro zone darkens, the European Central Bank has very little room for maneuver to revive its economy.

States Also Take Advantage Of Low Rates

For the past few months, states have been taking advantage of an unprecedented situation to borrow on the negative-rate bond market. Under these conditions, governments no longer hesitate to use this lever to finance public policies or to repay old loans fixed at much higher costs.

Savers: Big Losers From Low Rates?

Low rates clearly encourage individuals to consume more to take out new loans. However, depositing capital on savings accounts may cost savers but also financial organizations. Inflation is not for nothing, since a high risk merchant processing account that pays less than the cost of the degradation of the currency makes the holder lose money.

In addition, the banks continue to pay interest on their clients’ savings accounts while it finances the liquidity deposit at the ECB, which puts a strain on their budget balances. In this case, this paradigm pushes professionals to turn to riskier products to compensate for losses. Even today, life insurance does not necessarily bring the expected interest. In cash, it is no longer enough to save, but to become a real investor ready to commit to more adventurous operations.

Paul Watson