Central banks have been using low, and even negative, interest rates as a form of economic stimulus since the 2008 financial crisis. In theory, by reducing interest rates, this policy will cause economies to expand and benefit businesses, although this policy can have some negative consequences.
- Low interest rates reduce the cost of borrowing. This should make it easier for businesses to borrow the money they need to expand.
- Low interest rates discourage savings and holding on to high cash reserves, as money in treasuries or similar instruments will not earn much in the way of interest. The combination of low interest rates with low inflation makes cash particularly unattractive and should spur investment.
- Low interest rates may spur customers to increase buying, which benefits businesses.
- On the negative side, low interests rates can exert deflationary pressure on economies.
- If Britain and the EU maintain low interest rates, investors will move money to other countries. This may result in lowering foreign exchange rates, which gives an advantage to businesses seeking to export goods.
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