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Myth: low interest rates can't last

Myth: low interest rates can't last

Photographer:Fotograaf: Joey Roberts

Myth busters

“When interest rates have been low for some time, people are likely to think that they can rise at any moment,” says Dennis Bams, professor of Risk Management at the School of Business and Economics. “That is of course not so strange; over the past hundred years, this has happened all the time. It is what all scientists have always assumed: when interest rates deviate, they will return to the average before long. And the more they deviate, the quicker this will happen.”

But not these days. The usual laws and models appear to no longer apply, says Bams, who would not be surprised if interest rates were to remain low for a while. “For those who have savings, rates are at a dramatic low of 0.1 or 0.2 per cent. For banks, they are even negative. If they want to park their cash with the European Central Bank (ECB), they have to pay for that service. This has never happened before.”

What has caused this? The financial crisis, of course, says Bams. “That was an unbelievable blow, comparable to the depression in the nineteen-thirties. Just look at Ireland. First it was the richest country in Europe, then suddenly - with a single blow – it was thrown back among the countries in the middle bracket. Spain and Italy have still not recovered.”

There is a reason why interest rates are low. The ECB is hoping that businesses will borrow money cheaply in order to invest and that those with savings in the bank, will spend more money; saving, at any rate, is not attractive. All that spending should get the economy going again. “But it hasn't really worked out. Businesses have not invested much, savers have continued to save, and banks have issued very few loans. Everyone is scared and is holding on to their money. These are still uncertain times.”

The people who have a real problem with the low interest rates, are the pension funds, says Bams. “They have to ensure that their capital grows, so that they can issue pensions to all who are entitled. They do so by investing the contributions. The Netherlands is pre-eminently a pension fund country. We have more than a thousand billion in savings and hence these low interest rates are a problem. In their policies, the pension funds reckon on the basis that interest rates could remain low for the next five to ten years, before returning to normal levels.”

The Dutch Bank has been critical about the ECB's policy. “Our economy has picked up, mainly because the last government economised and made the labour market more flexible. Yet the ECB still keeps interest rates low, because the southern countries could benefit from this. Despite advice from the International Monetary Fund (IMF), France has still not reformed its labour market. That task is now for Macron. Italy is the greatest challenge. I work as a consultant for a bank in Rome and I see that change occurs very slowly in that country.”

In short, interest rates in Europe will remain low for a while. Could savers, just like banks, also be confronted with negative interest rates? “I don't think so. Banks and pension funds understand the context of such a situation. Savers most likely would not; they would be astonished if they had to pay to be allowed to save. That would create undesirable dynamics. The reputation of banks would soon be damaged severely.”

Mythbusters is a series in which academics shoot down popular myths on complex topics



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