03 July 2013

WSBI asks policymakers to plan putting an end to low interest rates as soon as the situation permits

From a macro-economic point of view, an unusually low interest rate level policy has been desirable in response to the financial crisis because debt ratios were no longer sustainable and led to a loss of confidence in the financial system and the real economy.

But current monetary policy and the capital movements sparked by the sovereign-debt crisis have caused the entire interest-rate spectrum to drop to unprecedentedly low levels. Combined with current inflation rates, this generates negative real interest rates.

Low interest rates do not constitute a solution to the problem of high debt and lack of confidence in the market, they merely facilitate debt sustainability for a certain length of time. The longer they are allowed to persist, the more problems they can create, such as gnawing away at the value of existing monetary assets; generating a disincentive to the propensity to save; increasing the risk of new bubbles; encouraging risk-taking initiatives; and fuelling inflation.

WSBI President Heinrich Haasis said: “The decisive precondition for putting an end to such policies is restoring confidence in financial markets, the European Monetary System, European economies and the eurozone’s ability to manage its debt". How? By reducing debt ratios; implementing national adjustments via consolidation and structural reforms; reforming labour, goods and services markets and social security and education systems; and ending the Eurozone’s financial fragmentation and vicious loop between sovereign and private debt.

WSBI acknowledges that it will take some years to implement these reforms and to restore confidence in the markets. “When that happens”, said Mr Haasis, “it will be time to end the policy of extremely low interest rates".

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