"Low interest rate environment” describes a state of the economy in which interest rates are very low – or even negative, in some cases – across all maturities. Exceptional policy rate cuts by central banks were a major contributor to the low interest rate environment that followed the financial crisis. These cuts were intended to bolster economic growth and inflation. The Eurosystem even lowered the interest rate on the deposit facility to below zero in order to achieve its primary goal of maintaining price stability. However, a downward trend in longer-term real interest rates is also currently in evidence in industrial countries, where annual growth rates have already been declining for years, not least because an ever-greater number of people going into retirement.
The Eurosystem’s highly accommodative monetary policy has supported aggregate demand and inflation in the euro area over the past few years. It may, however, have undesirable side effects as well, such as potential risks to financial stability. For instance, low interest rates may create incentives for yield-seeking investors to take excessive risks or result in overvaluations in the real estate market. A prolonged period of low interest rates also weighs on banks’ and insurance companies’ earnings.
From the public’s perspective, low interest rates are a double-edged sword. On the one hand, individuals only receive low interest payments on their bank balances – indeed, in some cases, negative interest rates force households to pay interest on their bank deposits. On the other hand, as employees, taxpayers and borrowers, individuals also benefit from the situation: favourable financial conditions for enterprises result in higher investment and increased demand, protect jobs, bolster growth in wages and thus in statutory pension payments, relieve the government budget and make it more affordable to take out loans for purposes such as building a house.
Negative nominal interest rates are a new phenomenon. By contrast, periods of negative real interest rates (i.e. the nominal interest rate less the inflation rate) on short-term bank deposits have occurred frequently in the past – for example, in the 1970s, at the start of the 1990s and in the 2000s.