Interest Rates

Policymakers initially resorted to government spending and low interest rates to boost demand. As government debt has ballooned and policy interest rates have hit rock bottom, central banks have focused on increasingly innovative policy to boost demand.

When Interest Rates Rise

Interest payments on the debt eventually become so burdensome that bondholders demand higher interest payments (Greek debt recently yielded over 30 ). Interest rates on US government debt remain low, so this threat is prospective, but future deficits will be far higher than government projections when rates normalize.

Will the government liberalize interest rates or loosen capital controls? How will the fiscal system be revamped?

The Trouble With Interest Rates

Interest rates are still low.

Slow Growth for US Interest Rates

Interest rates and inflation were high.

on the interest rates on private loans.

US Interest Rates Will Continue to Rise

The Long Mystery of Low Interest Rates

But real interest rates did not fall enough, because nominal interest rates cannot go below zero. By increasing inflation, the Fed would turn real interest rates seriously negative, thereby coercing thrifty households into spending instead of saving.

However, he believed that as the interest rate rise cycle of the Hong Kong Bank began and the Hong Kong dollar interest rates were normalizing, the situation that Hong Kong dollar interest rates were lower than US dollar interest rates would change in the future.

In fact, real (inflation adjusted) interest rates are hovering around zero throughout much of the world, and have been for more than five years. This is especially true for government borrowing, but corporate interest rates, too, are at record lows.

China s Five Year Plan and Global Interest Rates

Do Low Interest Rates Ensure High Asset Prices?

(v) High interest rates (30 40 per cent)

Bank of England to keep interest rates at 0.25

Will Rising Interest Rates Torpedo Stock and House Prices?

Another interpretation is that awash with liquidity merely means that interest rates are low. But interest rates have been increasing around the world since 2003.

However, some microfinance institutions charged interest on loans and the Government was investigating ways of reducing interest rates to ensure that the recipients of credit were able to benefit fully from it.

Interest rates had decreased significantly for domestic and foreign currency.

The zero lower bound arises because nominal interest rates cannot fall below zero. But if nominal interest rates stay positive, while inflation is negative, then real interest rates may become too high for an economy in recession, causing recession to become more severe and prolonged.

With tax revenue collapsing and expenditure ballooning, the government found itself running such large deficits that the markets were spooked government bond prices collapsed, interest rates soared, and the country found itself unable to finance its deficit. Where were the rock bottom interest rates that are supposed to characterize periods of weak growth and high unemployment?

In this case, the price of loanable funds is the real interest rate. An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long term bonds today.

Overvalued exchange rates, in turn, have attracted more inflows by adding to arbitrage margins created by high interest rates.

Because the US Federal Reserve and other central banks have driven their short term interest rates close to zero, they cannot lower rates further in order to prevent deflation from raising the real rate of interest. Higher real interest rates discourage credit financed purchases by households and businesses.

In normal times, any effort by a central bank to take short term interest rates too low for too long will boomerang. Short term market interest rates will fall, but, as investors begin to recognize the ultimate inflationary consequences of very loose monetary policy, longer term interest rates will rise.

In the US, the interest rate on government bonds now rises from 1.80 at five years to 2.86 for 10 year bonds and 3.70 for 30 year bonds. Comparing these interest rates with the yields on government inflation protected bonds shows that the corresponding implied inflation rates are 0.9 for five years, 1.3 for 10 years and 1.7 for 30 years.

Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.

When the markets see that coming, they will drive Italy s sovereign interest rates even lower. Given Italy s very large national debt, interest payments add more than 5 of GDP to the fiscal deficit. The combination of economic recovery and lower interest rates would produce a virtuous dynamic in which falling interest rates and a rising budget surplus are mutually reinforcing.

The trend of Hong Kong dollar interest rates and US dollar interest rates will be more consistent. Everyone must be more careful to manage risks and prepared to cope with market fluctuations.

In a country with large fiscal deficits, the central bank may have to keep interest rates high to control inflation. In this scenario, budget cuts create room for interest rates to fall.

In theory, as the economy picks up and interest rates begin to climb, central banks will simply pay higher interest rates on their reserves, so that they can finance their holdings of long term securities and shrink them slowly. But higher interest rates also imply large capital losses for central banks asset holdings.

abnormally high interest rates and violations of personal privacy will be vigorously rectified.

Moreover, ECB chief economist Otmar Issing predicts long term interest rates would go up not down as inflationary expectations increased. So cutting interest rates would not only be stupid it would be crazy.

(b) Official rates, determined by government authorities

But, by lowering long term interest rates, central bank purchases of government debt can help contain government debt service. In this way, QE can keep solvent a government that otherwise would be insolvent a nightmare scenario for a central bank.

Europe must ask itself how can interest rates induce a slowdown in 2007 when real interest rates have hardly budged despite an economically healthy 2006? Moreover, because profits are high in Europe, likely future increases in real interest rates needed to ensure price stability easily can be financed out of profits without economic disruption.

Although governments may try to cram public debt down the throats of local savers (by using, for example, their rising influence over banks to force them to hold a disproportionate quantity of government paper), they will eventually find themselves having to pay much higher interest rates as well. Within a couple years, interest rates on long term US Treasury notes could easily rise 3 4 , with interest rates on other governments paper rising as much, or more.

Despite unprecedentedly low interest rates, investment in most advanced countries is significantly below where it was in the years prior to the 2008 crisis, while employment rates remain stubbornly low. And even investment in the pre crisis period was unimpressive, given low prevailing interest rates.

After all, corporate borrowers do not borrow at the risk free yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households. In fact, the causality is the reverse the reason why government interest rates in the UK and elsewhere are so low is that interest rates for private sector loans are so high.

This decrease reflected the continuous cutting of short term interest rates by central banks worldwide the rates dropped to a 45 year low.

A major objective was to allow factor prices to reflect resource scarcities, hence the emphasis inter alia on exchange rates and interest rates.