Is it good that central banks still decrease interest rates?
In last weeks many central banks all over the world were cutting interest rates - some of them very sharply. In the beginning of October there was a broad action of central banks (FED, ECB, central banks in UK, Switzerland, Canada and Japan) who decreased the interest rates. Later on there were further cuts in US, UK and Switzerland.
Of course these activities ar aimed at stopping the recession. Central banks think that lower interest rates will help the economy and will not let the crisis stop economic growth. Is it realistic?
I think it is not. In normaln circumstances, lower interest rates encourage banks to lend money. The enterprenours can borrow and invest. But - isn’t it the loan market that led us to this crisis. In fact, too low interest rates were the reason of the sub-prime bubble.
Now we are seeing even lower interest rates. Of course the bubble won’t come back - now lots of people are selling their houses and banks are not willing to finance buying houses which are dimishing in value. However, I don’t think the interest rates are the good tool to be used in this situation. Now there is general lack of confidence in the market and this is the main problem. Lowering rates or pumping billions of dollars in the market won’t change it in a long term - this may be a solution for a short period of time, but the problem is still there. The truth is, the recession must come to us and we have to face it. And too low interest rates still may become a problem. Usually in the recession prices don’t tend to go up, so the central banks may think that inflation is not now a problem. However, we had in the history some examples of stagflation. Let’s hope we won’t get it this time, because it’s the worst that can happen.
Tags: central bank, inflation, interest rates
Financial Crisis, Loans and Banking | admin | 
November 8, 2008 11:49 pm