Interest rates around the world are lower than they have been in decades, and this can lead to some real bargains. Low interest rates, however, do not always mean good things for the economy.
This article considers why interest rates are so low, globally.
LOW INFLATION
As economies are struggling to grow, and are even suffering negative growth in many cases, this leads to situations wherein inflation remains very low. With many countries experiencing what are considerably low inflation rates, and some even experiencing deflation, there is less need for interest rates to be set high. Low inflation can be seen as a good thing for the majority of people, but it is also important to recognize that low inflation is a sign of slow growth within the economy.
LOW GROWTH RATES
Low interest rates are often used as a stimulus for growth within an economy. By reducing interest rates, costs are reduced, and this frees trade more effectively. The UK is experiencing negative growth, and growth in the U.S. is very slow and limited. As much of the world is still suffering the effects of the Global Financial Crisis (GFC), it is logical for the major banks to hold back on interest, so that the economies can stabilize and begin to grow once more. Low interest rates encourage share trading and investment, which will, in turn, help to aid the economy.
RISK AVERSION
In the wake of the GFC, the Tsunami in Japan, and the near collapse of the Euro, investors are, understandably, scared to invest. This risk aversion means that investors are far less willing to make financial commitments, even to government bonds, unless the return is very good. With low interest rates, these investments are more favourable, and allow trade to continue.
EMBRACING LOW RATES
Whilst low interest rates are certainly a sign of a struggling economy, holding back on spending can actually help to accentuate the problem. A large element in why the markets are struggling so much, globally, is because investors and consumers are too wary to spend. Investment, at present, is actually a very good idea, because the value of almost everything has dropped significantly.
Many people are learning Forex, so that they can make the most of low rates and invest in shares, while the going is good. Investing and spending will actually also help to boost the economy, as well as setting yourself up for the future. Other forms of investment, like property investment and the establishment of a small business, can significantly aid your income, and help the economy too.
CAUTION IS KEY
Caution is a very important element of embracing low interest rates, however. Much of the reason that the rates are so low is because of a crash caused by blind borrowing. People, for many years in the past, have been living a life of debt, whereby they borrow more than they can afford to repay. It was this overstretching of the markets that caused them to snap and drop so rapidly. The snap also resulted in severe losses for those who could not afford to continue living at such high rates of borrowing.
To avoid such events happening again, it is the responsibility of everyone to live within their means. Investing what you have is wise, but borrowing what you cannot afford will only make the problem worse.
