Interest Rate Reductions Reach Historical Lows: What are the Results of the ECB’s Low Interest Rate Policy?

Over the course of the financial crisis and deteriorating real economic activity the European Central Bank (ECB) has lowered interest rates in the Eurozone to historic lows. What are the risks of this low-interest rate policy? According to Michael Schubert, Commerzbank AG, Frankfurt am Main, low interest rates cannot combat the causes of the crisis, namely soaring public deficits and the structural problems in peripheral countries. They will at best help to diminish some of the symptoms. Sebastian Watzka, Ludwig-Maximilians University of Munich, does not believe that the current excessively low interest rates pose any really major danger for the German financial market and the real economy. On the contrary, with the growing danger of a recession in the Eurozone the current situation in the financial market is characterised by the search for presumably safe bonds. Developments in asset values and risk-taking nevertheless merit close observation in the future. For Jörg Hinze and Leon Leschus, Hamburg Institute of World Economics, fears that expansive monetary and fiscal policy could lead to inflation in view of the current recessionary downturns in many countries are unjustified. In the Eurozone the debate is centering more on deflation risks and the need for new growth programs and /or stimulating measures. For Gunther Schnabl, University of Leipzig, today’s monetary policy crisis therapy will be the cause of tomorrow’s crisis. New, ever bigger liquidity injections will be necessary since the results of the gradual fall in world interest rate levels are not limited to the financial markets, but act as an incentive for rising public borrowing, which will have lasting repercussions for monetary policy.