Essay on Why are interest rates so low in the traditional core markets of USD and EUR?

The interest rates in the U.S., in Japan and in Europe now are remarkably low: in the U.S. and in Japan the rates are near 0%, and in Europe they are about 1% (Moffett, Stonehill & Eiteman, 2012). This situation has been largely driven by the 2007-2009 financial crisis, during which both U.S. and Europe used fiscal mechanisms and interest rates to regulate the economy.

According to Keynesian economical theory, fiscal policy can be used to stimulate aggregate demand and employment during the recession times; in this model, lowering interest rates will lead to increased economic activity, increase lending, encourage economic agents to purchase more and to work more.

Both European Central Bank and the U.S. Federal Reserve gradually reduced interest rates and have come to near-zero values (Moffett, Stonehill & Eiteman, 2012); in this way, the governments of both USD and EUR region were trying to support their banking systems and maintain a reasonable level of liquidity.

Another factor which affects the interest rates and contributes to the lowering of interest rates in the developed markets such as Europe, USA and Japan, is deflation; many developed countries are now experiencing deflation or witness lower inflation than expected.

Weak economic growth currently witnessed at the markets of U.S. and Europe also contributes to the trend of keeping interest rates low, and to a certain extent further aggravates the slowdown. Moreover, the activity of the investors leads to shorting of the euro and the dollar. All these factors altogether create pressure on financial markets of the U.S., Europe, Japan and other advanced economies, and contribute to the prolonged trend towards record-breaking low interest rate levels in these countries.

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