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Low interest rates: what are the impacts for consumers and companies?

  • Laurent Quignon Head of Banking Economics at BNP Paribas
  • Paris, France
  • 19.01.2018

In Europe, interest rates have remained at historically low levels ever since the 2008 subprime crisis. That has come as a blessing for individuals looking to take out loans at competitive rates. Why are the rates so low and what are the consequences?

What is an interest rate?

In 2011, the epicenter of the economic crisis shifted from the United States to Europe. At the time, the interest rate for a 20-year mortgage floated between 3.4 and 4.6%. These rates have since remained in steady decline. 

Interest rates are like the ‘rent’ paid for money. In other words, it is the payment collected by the person or entity lending the money. In this case, it’s the bank that pays its creditors, meaning some of its depositors and shareholders. 

When rates are low, borrowers have the option to take on debt at low cost, which naturally gives a boost to spending and even investments. However, remember that in this situation, the price of assets (property or bonds, for example) goes up. On the other hand, when rates are high and credit is expensive, loans and purchases taper off and asset prices drop. 

Why are interest rates so low right now?

As far as interest rates go, central banks determine their benchmark rates, which set the standard for the interest rates used by banks. Benchmark rates correspond to the ‘rent’ paid for money as set by central banks when they lend money to commercial banks (in Europe, the European Central Bank, or ECB). They are known as benchmark rates because they steer the market rates. Since 2014, the ECB’s main benchmark, the rate on main refinancing operations, has hovered around 0%, or even below! In addition, the European Quantitative Easing policy (massive purchase of securities by the ECB to increase the money supply) impacts long-term rates, which are also very low. The 10-year borrowing rate in France sits around 0.5%. By setting its benchmark rates so low, the ECB is hoping to stimulate credit and ultimately reinvigorate economic activity among member states. 

Negative interest rates on excess reserves—in addition to reserves compiled to meet prudential regulations—also incentivize banks to lend central liquidity on interbank markets. That lowers rates on money markets and, indirectly, interest rates on short-term market financing and bank loans with variable rates. 

How do they impact companies and consumers? 

Low interest rates benefit the real economy by providing companies with easier access to loans. In France, over 1 million companies and SMEs use credit to fund their operations. In 2015 and 2016 alone, loans issued to SMEs increased by 2.7%. These businesses have never had such wide open access to credit. In fact, nine out of 10 SMEs succeed in obtaining the investment loans they request !

It’s also easier for consumers to access loans. In France, between 2015 and 2016, loans issued to households rose by 4.5% and reached a total balance of 1,096 billion euros. Mortgages grew by 4.3% for a total balance of 899 billion euros.

According to the French National Bank, loans issued to households in France increased by 5.7% year-on-year between September 2016 and 2017. Across Europe, these loans climbed by 6.8%, fueled notably by the credit boom in Italy and Spain .

Key figures for European loans

European Union

  • 6,150 billion euros in total mortgage balances across the European Union at the end of 2016 
  • +3.1% growth in total mortgage balances between 2015 and 2016
  • +9% increase in total balances over five years 

France

  • Nearly half the people in France have at least one loan
  • 1.66%: the average interest rate of household loans   
  • €2,203 billion in total bank loans issued in France
  • +4.4% in credit for French banks in 2016
  • +50 billion euros in new loans issued every month by French banks

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