5 reasons why low interest rates here and overseas are bad in the long run

萨米

By Bernard Hickey
        The country appeared to breathe a collective sigh of relief last week when Reserve Bank Governor Alan Bollard cut the Official Cash Rate by 0.5% back to a record low 2.5%




        His view that it was a necessary insurance policy and confidence boost for an economy on its knees was widely accepted.

        But here's 5 reasons why I think very low interest rates both here and overseas are not good in the long run.

        They punish savers
        Headline writers and interest groups almost always see the world through the prism of the borrower. Either they are in debt themselves or believe that the 'mortgage belt' are the dominant political and consumer force. New Zealand households owe NZ$183 billion, farmers owe NZ$47.8 billion and businesses owe NZ$73.3 billion. Yet households have also put NZ$97.4 billion into deposit accounts at banks.
        Dr Bollard has previously commented that he gets the most complaints whenever he cuts interest rates as retirees and others who depend on those deposits see their income slashed. This week's decision is likely to cost anyone with NZ$200,000 on deposit at a bank around NZ$20 a week before tax.





        They encourage borrowing
        New Zealand has a debt problem. Our net foreign debt is approaching 90% of GDP, which is similar to the PIGS (Portugal, Ireland, Greece and Spain) who are in such trouble at the moment. Most of this is private mortgage debt owed via our banks to foreign creditors.


        Lower interest rates just encourage New Zealanders to borrow more, which means more foreign borrowing.

        They encourage risk taking
        A side effect of the extremely low interest rates imposed by the US Federal Reserve and other central banks is that it encourages banks and others out into riskier assets.
        Many investors in America who are reluctant to accept nearly zero percent from term deposits are pushing their money out into corporate bonds, emerging market bonds and even higher yielding shares.
        This is exactly what the US Federal Reserve wants, hoping it will trickle down into investment in businesses and jobs.
        Unfortunately most of the freshly printed US dollars being squirted out around the world are being pumped into higher commodity prices and investment in developing economies such as China and India.
        Some of this almost free money is also finding its way to New Zealand.
        Ironically one of New Zealand's biggest foreign borrowers at the moment is Kiwibank, which has borrowed hundreds of millions of dollars in hot money markets offshore in recent months because it is easier and cheaper to get than term deposits locally.




        Also, companies including Auckland International Airport, Mighty River Power, Transpower and Vector are planning to borrow at least NZ$1 billion the US private debt market this year.

        They lower lending standards
        Lower interest rates encourage those who can't afford to pay higher rates to borrow. Lower rates are often accompanied by a lowering of credit standards by banks.
        The biggest banks have quietly been offering 95% loans through brokers in recent weeks, boasting of how many deals they have done and encouraging borrowers to increase the size of their loans to renovate and extend.

        They blow up asset bubbles
        The history of the last decade should teach anyone that low interest rates eventually blow up asset prices into bubbles that eventually burst.
        The biggest cause of the sub-prime crisis in America was the slashing of interest rates after the September 11 attacks.


http://www.interest.co.nz/opinion/52672/opinion-bernard-hickey-gives-5-reasons-why-low-interest-rates-here-and-overseas-are-bad-us-all-l