Why are interest rates so low?

Why are interest rates so low?

Author
Discussion

Rickeh

246 posts

214 months

Friday 5th October 2012
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They are low because they want people to spend money instead of saving it to stop the country going into recession/negative growth. Save in the good times and spend in the bad times to even it out.

It is a tool of central banks that is generally independantly set according to the state of the economy and is an example of monetary policy. The other main tool of monetary policy is quantatitive easing.

Fiscal policy is changing the amount of government spending/taxation.

Don't confuse the interest rates set by the Bank of England with the interest rates paid on government debt which is decided by the markets, as someone has done above. That interest rate is how much it costs the government to borrow money and is dependant on the percieved likelihood of default.

fid

2,428 posts

239 months

Friday 5th October 2012
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The problem with artificially low interest rates designed to help people repay their excessive debt is that house prices remain artificially high, which gives enough confidence for some to continue to buy. The result being the rather uncomfortable position of repaying a mortgage on an over-priced house, with interest rates that can only go up.

This, of course, is an unsustainable situation.

But if any government mentions it, can you imagine what would happen? So, instead, they keep quiet. Low interest rates are maintained. Everything continues to tick over, slowly. There's no growth, because there's no reason for growth. There's just a big big problem waiting to happen. And there's no way around it.

Interest rates are low for one reason - to delay the inevitable.

TooLateForAName

Original Poster:

4,725 posts

183 months

Friday 5th October 2012
quotequote all
fid, that's what worries me.

But is there any way out of this (as someone already called it) catch-22?

I'm of the view that we are stuffed.

porridge

1,109 posts

143 months

Friday 5th October 2012
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Gazzas86 said:
With interest rates being low, it has allowed me and the OH to get a mortgage last year, we're paying 3.59% which at the moment we can afford to overpay on our mortgage, but.... won't be able to when they go back up again. hopefully they will stay low for a while smile
Errr...ok.

fid

2,428 posts

239 months

Friday 5th October 2012
quotequote all
TooLateForAName said:
fid, that's what worries me.

But is there any way out of this (as someone already called it) catch-22?
I would say there are two options: an interest rate rise induced crash, or stagnation. If there's a crash, it needs to be a proper one. People will lose their jobs and homes (and buy-to-let portfolios, because rent won't cover mortgage payments). If there's stagnation, which we've had since 2008 if you strip out the QE effect, it needs to be for a long time. Anything else would be false and a further delay to reality.

DSLiverpool

14,670 posts

201 months

Friday 5th October 2012
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Bluequay said:
It's being used to keep mortgage payments artifically low. This should in theory release more money for people to spend and stimulate the economy, it should also help to prevent people defaulting on their mortgages during the financial downturn. Sensible people however are saving this extra money and paying down their mortgages and other debts so it's not having much of an effect.
This, plus the fact many will be homeless when they do go up sending us into another recession (probably)

fid

2,428 posts

239 months

Friday 5th October 2012
quotequote all
Bluequay said:
...This should in theory release more money for people to spend and stimulate the economy...
Except that simply wouldn't work and won't happen - you can't stimulate an economy to a level fuelled by low cost borrowing, without using low cost borrowing. It's all talk, but the government would be crazy to admit it.

-Pete-

2,892 posts

175 months

Friday 5th October 2012
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The financially prudent and the pensioners' savings are subsidizing the buy to let chancers and overstretched property ladder wannabees. The historical average of the post-war years is that savers get 1.5% - 2% more than the borrowers pay, but right now that would cause chaos. So right now, debt = good, savings = bad.

thesyn

540 posts

180 months

Friday 5th October 2012
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Raise interest rates then UK plc would likely st the the bed!

Derek Chevalier

3,942 posts

172 months

Saturday 6th October 2012
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isleofthorns said:
With hindsight the period post-2001 to 2007 should have had higher rates to dampen the debt bubble, which would have certainly lessened the current problems. My view is that it was an unfortunate cocktail of politics and greed, with post-911 America doing everything possible to keep things on the up, Brown and his 'no more boom and bust' and, not forgetting, the greedy bankers!

With hindsight? Really? You also forget to mention Joe Public's part in this.

isleofthorns

472 posts

169 months

Sunday 7th October 2012
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I thought afterwards that I should have included Joe Public - their role was clearly massive.
Having said that, people only do what they are allowed to do. Lenders still bear the ultimate responsibility, with the financial services authority, the treasury and the govt all at fault.
As for me, I sold my then house for rented in 2001, in part to fund my business, but also because I thought the world had gone mad and a major correction was on the cards!!
Naively I thought that govt & the authorities would take action to stop what was happening.... I am still surprised how wrong I was, and how far things have changed since.