FRANKFURT, Germany – Record low interest rates were meant to be a temporary response to the global financial crisis.
But eight years later, rates are still near zero or even below in much of the developed world, and some experts are warning of long-term side effects: a hit to pension savings, pressure on banks, and possible booms and busts in stock markets and real estate.
In any case, low rates are increasingly just part of the economic landscape. Some economists argue that people may have to get used to living in a zero-interest world for a lot longer than they expected, or at least one with rates far lower than those in recent decades.
Here's a look at how we got here and what ultra-low interest rates means for people.
Q: How did interest rates get so low?
A: Rates on things like mortgages or company or government bonds are guided by market demand and by official interest rates set by central banks. They have cut their benchmarks aggressively, starting eight years ago.
The Federal Reserve lowered its short-term benchmark — which determines the cost of overnight lending between banks — to between zero and 0.25 percent in December 2008. The European Central Bank reached zero in March on its benchmark rate, and minus 0.4 percent on bank deposits. Last week, the Bank of England cut its benchmark rate to 0.25 percent and indicated it could bring it closer to zero. The Bank of Japan applies a minus 0.1 percent rate on new bank reserves.
To further drive down market interest rates, central banks have also bought hundreds of billions in bonds, which lowers the bonds' interest rate yield.
Things have gone so far that German 10-year bonds yield slightly less than zero, meaning the government would make a small profit by borrowing money for an entire decade.
Q: Why did central banks cut rates so much?
A: The idea is to stimulate economic growth and job creation by cutting borrowing costs for businesses and consumers, making it easier to buy things and invest in new production.
They lower returns on ultra-safe investment and push people toward riskier but potentially more profitable ones, such as stocks bonds and real estate.
The idea is "to get people to take risks that they weren't taking before," said Stephen G. Cecchetti, professor of international economics at the Brandeis International Business School. "And when you get them to do that, what happens is that it drives up growth, employment, and prices, and that's a good thing."
Q: What is the downside to low rates?
A: Some experts warn they can encourage investors looking for higher returns to bid up too much the price of riskier investments. That can lead to a "bubble" in that market that is at some point followed by a crash. Economists at Germany's Commerzbank warned house prices in Germany "look increasingly like a bubble." Sweden's central bank has warned that house prices have risen too fast and consumers have too much debt.
What about stocks? U.S. stock markets are near record highs. But it's hard to say; stocks are affected by many factors and the U.S. economy has been growing steadily.
Q: Is that the only risk?
A: No, low interest rates also mean that people's savings won't grow as much over the years.
Central banks have cut rates to encourage savers to spend or invest, but it could also have the opposite effect. People who see their savings are not growing as much as hoped due to lower returns could put more money aside, not less.
The same thing happens on a larger scale with corporate pensions. Carmaker Daimler AG said in June it was transferring its stakes in Renault SA and Nissan Motor Co. into its pension fund, adding 1.8 billion euros ($2 billion). Siemens said underfunding of its pension plan rose by 1.8 billion euros in the most recent quarter, from 10.9 billion.
Companies may also be tempted to do less productive things with money that is borrowed cheaply — such as buying back their own shares rather than investing in new production.
And rates near zero may actually increase the fear factor by indicating that policy makers think there's a crisis, argues Ian Shepherdson, chief economist at Pantheon Macroeconomics: "You signal to everybody that the economy stinks... Maybe when rates get that low, people become alarmed by further rate cuts, rather than pleased by further rate cuts."
Q: Some banks are blaming low rates for poor earnings. Is that true?
A: For some, yes. Interest rates around zero compress the difference between what the bank pays to borrow and the rates at which it lends. That cuts their interest earnings. And unprofitable banks are hampered in making new loans to companies — a drag on the economy.
Rates near zero rates have in particular become a concern for banks in Europe, which are struggling with low profits overall and with lingering bad loans, especially in Italy. U.S. banks, by contrast, were pushed to clean up their finances early on after the global financial crisis and are in better shape.
Q: So when does all this end?
A: Interest rates were supposed to be slowly raised from record lows as economies started to recover. But that's not happening. Even in the U.S., where the economy is growing steadily, the Fed has been very cautious in raising its key rate, making only one quarter-point increase to 0.25-0.50 percent.
Some economists say that weaknesses in the global economy may mean that the normal level of interest rates is lower than it used to be — and central banks have to take that into consideration. If they don't, they wind up setting rates that are higher than the economy can bear.
"Low long-run real rates do create problems, but they are not caused by central banks," Cecchetti said. "There is a sense in which central bank policies have followed real rates down. They have to, otherwise they're tightening without wanting to."
In other words, we could be in this low rate world for a while yet.