The government's decision to reduce the rate of interest on home loans may backfire and add to the current financial crisis. Interest rate reduction has been engineered to propel the housing demand, which in turn will boost the cement, steel and other related markets.
I see two caveats, which eventually may exacerbate the crisis instead of ameliorating the condition as desired.
Firstly the anticipatory reaction of the public that markets will crash further and government might further reduce the interest rates might refrain people from purchasing for a while. Opposite to what was planned, government's action might actually trigger the deflationary cycle.
Secondly banks, as all private institutions are, will never like their profits go down. Interest rate reduction will be compensated by interest rates increase in some other areas such as corporate loans. Here government's act may dispel the funds from corporate; Or increased rate of interest may not leave them any other option but to default.
I see two caveats, which eventually may exacerbate the crisis instead of ameliorating the condition as desired.
Firstly the anticipatory reaction of the public that markets will crash further and government might further reduce the interest rates might refrain people from purchasing for a while. Opposite to what was planned, government's action might actually trigger the deflationary cycle.
Secondly banks, as all private institutions are, will never like their profits go down. Interest rate reduction will be compensated by interest rates increase in some other areas such as corporate loans. Here government's act may dispel the funds from corporate; Or increased rate of interest may not leave them any other option but to default.
Government's any intervention in natural cycle may germinate undesired consequences for which we are certainly not prepared.
