The basis of the zero rate or negative rate policy is that this policy stimulates consumption: more is spent because credit costs, or better, it would cost less, while there is no incentive to save because this is not rewarded. This transaction on rates is accompanied by the intervention on the market with the purchase of government or equity securities, an activity that keeps yields low, prices high and introduces liquidity into the system. The Bank of Japan, by buying ETFs on Japanese shares, owns 80% of them….
The problem is that a Bank of America research has linked the interest rates paid on US government bonds; therefore related to the monetary policy followed by the Central Bank (on the abscissas) and household expenses (on the ordinates). In theory we should have the maximum expenditure against minimum rates of government bonds, which influence the rates paid on loans in the real economy: in fact the rate of government bonds is the basic return, without risk, in the calculation of the return of others titles.
The results are these:
Contrary to what one might think, the maximum expenditure for households does not occur at rates close to zero in government bonds, but with a yield of around 4%. Why is this happening?
- excessively low rates force private pension systems to save more for a decent pension;
- in public pension systems, however, the return on private savings is very low and does not encourage consumption;
- low rates do not affect consumer rates.
I will give you a practical and European example: the interest rates on European government bonds vary between -0.7% German and 1.6% Italian. The rates applied by the ECB are -0.5% on deposits, and 0% on loans, yet the rates applied, for example, by FCA and VW for the purchase of cars are:
Fiat Panda APR 9.59%;
VW UP. 8.07%.
It is clear that zero rates do not have an impact on consumption.
So the action of the Central Banks fails to give any stimulus to the economy even by lowering interest rates to zero. It would be necessary to find tools to get the money to those who consume directly, but without excessively reducing the interest on financial assets. If it were the time for helicopter money?
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/il-grafico-che-mette-in-difficolta-le-banche-centrali-i-tassi-troppo-bassi-non-rilanciano-leconomia/ on Tue, 02 Jun 2020 06:00:11 +0000.