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Low interest rate: Incentive and subsidy

Some of the benefit due to a low interest rate policy is not an incentive; it is a subsidy

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Gurbachan Singh
“It was the best of times, it was the worst of times …” Charles Dickens

Low interest rates are a big boon for borrowers. However, they are a serious problem for savers. Low interest rates are supposed to act as an incentive for real investment and, relatedly, the revival of the economy. However, real investment is often not very responsive to interest rate cuts when we have an economic slowdown. So, some of the benefit due to a low interest rate policy is not an incentive; it is a subsidy. 

Consider, for example, the homebuyers. A stylised fact is that home prices
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

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