Most of the unconventional measures (quantitative easing and credit easing) put in place are designed to stimulate lending, to convince savers to hold risky longer-term assets.
The extremely low interest rates and ample liquidity aims at favouring borrowers and penalising lenders over the medium term.
The effectiveness of these measures mainly depends on the readiness of banks to go back to their main business of lending to households and firms rather than parking excess reserves with the central bank.
Problem of Exiting or Reversing
Raising policy rates, or the expectation of such increases, when confidence is not fully restored could therefore be counterproductive.
The extremely low interest rates and ample liquidity aims at favouring borrowers and penalising lenders over the medium term.
The effectiveness of these measures mainly depends on the readiness of banks to go back to their main business of lending to households and firms rather than parking excess reserves with the central bank.
Problem of Exiting or Reversing
Prospects of rising interest rates may discourage private savers from purchasing longer-term assets, as a tightening of monetary policy inevitably implies a capital loss for those who bought these assets.
An increase in policy rates – and in particular in the deposit rate – risks undermining banks’ incentive to re-engage in funding the private sector.
An increase in policy rates – and in particular in the deposit rate – risks undermining banks’ incentive to re-engage in funding the private sector.
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