Tuesday 5 April 2016

Could a crisis come from the current low interest rate environment?

I read an article "Currency wars backfire for Japan and Europe" on Financial Times. It is interesting and describes the environment of low interest rates. When almost all central banks lower their base rates, the world exchange rates will stay constant and the global inflationary pressure would increase. Currently we have experienced a long time of low interest rates since the 2007 financial crisis. After learning from the subprime crisis, undoubtedly now banks become more careful about their lending decisions. However, we can still see the gearing rates of many large companies increase and those companies are very good at borrowing to pay back their matured bonds. These bonds with good credits, even AAA ratings could go wrong. Moreover, this system is widely spread and interconnected. One company usually borrows from many banks and one bank lends to many companies as well as banks. Anything wrong that happens in one such company or bank could bring down the whole system and eventually cause a financial crisis.

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