Given today s exceptionally low long term interest rates, the annual cost would be, well, peanuts.

This is intended to stimulate private spending by bringing down the rate of interest at which banks lend to their customers.

Third, consumers are generally not adept at dealing with interest rate risk.

Only the eurozone seems to be bucking the trend, as the European Central Bank has allowed a rise in the short term interest rate.

Meanwhile, interest rates on bank loans to nonfinancial enterprises remain close to 7 , despite having fallen slightly over the last year. And, in the second quarter of this year, the annualized interest rate on loans to small nonfinancial corporations surpassed 25 .

China s Interest Rate Challenge

The Real Interest Rate Risk

First, the Fed is trying to give relatively specific guidance about the future path of the federal funds rate (the overnight rate at which commercial banks lend to each other).

And it is the real interest rate not the money rate that counts for economic growth.

For example, the classical prohibition on usury was softened from a ban on charging interest on all loans to a ban on charging interest on loans for which the lender had no alternative use, i.e., for charging interest on hoards or cash balances.

Nevertheless, until 2011, the Selic remained at levels that were incompatible with the economy s clear strengths and low risks.

America s Interest Rate Puzzle

But the current version of this promise not to raise the overnight interest rate until the unemployment rate drops below 6.5 no longer implies that short term rates will remain low for an extended period.

He has cut short term interest rates to the bone.

Lower interest rates are not a solution to this dilemma.

Because the inflation rate is also about 2 , this implies a negative real interest rate, which is confirmed by the interest rate of 0.6 on ten year Treasury Inflation Protected Securities (TIPS), which adjust interest and principal payments for inflation.

Under the current system, the fixed differentials between interest rates on deposits and those on loans translate into monopolistic profits for commercial banks.

First, while the US Federal Reserve continued hiking short term interest rates, long terms rates did not increase in tandem, which allowed housing prices to continue rising.

Second, China s central bank still controls interest rates by enforcing a roughly three percentage point spread between deposit rates and lending rates.

According to the followers of Knut Wicksell, the central bank must keep the market rate of interest near the natural rate of interest.

In May 2006, the fairly free domestic interbank rate was just 1.62 , while the US Federal Funds rate was 5 .

As a result, the interest rate for 12 month fixed deposits has reached 3.9 .

At present, the interest rate is less than 0.5 .

The second adverse effect of deflation is to raise the real interest rate, that is, the difference between the nominal interest rate and the rate of inflation.

But the interest rate that Greece must pay buyers of its government bonds has shot up to a record high level of nearly 9 5.9 percentage points above the benchmark rate paid by Germany.

Domestic deflation means that the real interest rate on Japanese bonds is higher than the nominal rate.

Foreign investors then sent their money to New York to take advantage of the higher rates.

The degree of financial repression in a country can be estimated by calculating the gap between the average nominal GDP growth rate and the average long term interest rate, with a larger gap indicating more severe repression.

However, this is no longer applied since the central bank started changing rates by 0.25 percentage points on October 19, 2010 (which was a rate increase).

Now they are calling on their central banks to ensure stability by, for example, raising short term lending rates.

But when prices are falling, the real interest rate exceeds the nominal rate.

In Japan, the ten year rate has drifted to below 0.8 .

And, due to rising consumer prices, the nominal interest rate will continue to rise.

It may have had something to do with the near total lack of response of long term interest rates to monetary tightening.

If it is intended to finance the proposed plan of work for exploration by borrowings, attach a statement of the amount of such borrowings, the repayment period and the interest rate.

And that is important, because a rise in the federal funds rate will cause other, somewhat longer interest rates to increase as well.

Hence, real long term rates remained quite high in the mid 1980 s.

Past experience implies that the real rate will rise to at least 2 , taking the total nominal interest rate to more than 4 , even if expected inflation remains at just 2 .

But this time, even as the US Federal Reserve keeps hiking its short term lending rate to keep inflation in line, long term interest rates which are far more important have been magically declining.

Since the interest rate set by the ECB is now less than 1 , there is little difference between its current monetary policy and what the Bank of Spain would do if it could set its own interest rate. But when the euro zone starts to recover, the ECB might choose to raise the interest rate before a higher rate would be appropriate for Spain, which could exacerbate Spanish unemployment.

All the above assumes that the interest rate remains constant throughout the whole period.

Indeed, the interest rate on inflation protected bonds has now become 0.5 , even for a five year maturity!

Thus, the market can establish the necessary interest differential only if interest rates on yuan assets fall below their dollar equivalents.

So, if the PBOC sets the interest rate on one year deposits at 3 , commercial banks can offer depositors a rate as high as 3.3 .

But such an insignificant rate hike will do little to relieve long term pressures, because investors will expect more rate hikes and move money into China, increasing upward pressure on the yuan s exchange rate.