Why are low interest rates not always good for the economy?
Answer (2)
At first glance, low interest rates seem good—they make borrowing cheaper, encourage investment, and help people buy homes or start businesses. But while low interest rates can help during a recession, they are not always beneficial, especially if used for too long or in the wrong situation.When the Bangko Sentral ng Pilipinas (BSP) lowers interest rates, it hopes to boost spending. This is useful when people and businesses are too scared to spend, like during the pandemic in 2020. Many Filipinos used loans to restart businesses or pay school fees. But if interest rates stay too low for too long, it can lead to problems.First, too much borrowing can create economic bubbles. For example, if people borrow too much to buy real estate, prices may rise too quickly. This happened in some parts of Metro Manila before the pandemic, where condo prices rose fast due to easy credit. If prices crash, many borrowers are left in debt.Second, low interest rates can lead to overheating of the economy. If people borrow and spend too much, demand rises faster than supply, causing inflation. For instance, if food and fuel demand goes up but supply can’t keep up, prices rise.Third, savers are punished. When interest rates are very low, people who rely on savings—like retirees—earn almost nothing from their bank deposits. They may cut spending, which hurts the economy.Also, businesses might invest in risky projects, knowing they can borrow cheaply. If these projects fail, they create waste and even job losses later on.Lastly, once low interest rates are in place, it becomes harder for the BSP to use them in future crises. If the rate is already near zero, there’s little room left to cut it further during emergencies.In conclusion, low interest rates can help in the short term, especially during recessions. But if used for too long or without proper monitoring, they can create bubbles, inflation, risky behavior, and long-term harm to the economy. Balance is key.
Low interest rates are not always good because they can encourage excessive borrowing and risk-taking, potentially leading to asset bubbles and financial instability. They may also reduce returns for savers and hurt banks' profitability, which can limit lending in the long run. Additionally, very low rates can signal economic weakness, reducing confidence.
