Their studies are wrong---low interest rates drive employment, which is the key factor in reducing inequality

John Hawkins, “Are low interest rates increasing inequality? No, says the world’s central bank,” The Conversation, 6-30-21, https://theconversation.com/are-low-interest-rates-increasing-inequality-no-says-the-worlds-central-bank-163480

Phillip Lowe, the governor of the Reserve Bank of Australia, gets many letters and emails from retirees complaining they can’t live on the interest from their savings when interest rates are so low.

“I read these letters, many of them are very heartfelt and I feel very bad for the people who are in this situation,” he told the House of Representatives standing committee on economics in February. “So I try and say we understand. The second thing I do is explain why we’re in this situation.”

Low interest rates have other critics.

The idea that central banks have increased wealth inequality by keeping interest rates so low is so widespread that the central bank for central banks, the Bank for International Settlements (BIS), has addressed the issue in its 2021 annual economic report.

The argument goes like this.

Low interest rates means potential buyers can afford to borrow more. This pushes up the price of houses. Low interest rates also encourage spending rather than saving, which contributes more to company profits and thus more dividends for shareholders. This increases the value of shares.

These factors benefit those who can afford to own property and shares. So the rich get richer.

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Some studies support this argument. The Netherlands’ central bank, for example, published a report in 2019 analysing almost a century of data for 12 advanced economies. It concluded low interest rates increased the income share of the top 1%.

RBA research published in February 2020 also found low interest rates increase housing wealth inequality, by bumping up the value of more expensive homes. Lowe’s deputy, Guy Debelle, acknowledged the “distributional consequences” of rising house prices in a speech in May, though said this wasn’t the RBA’s problem to fix.

So what is the the view of the BIS, the global expert on monetary policy?

It agrees the gap between the rich and the poor within countries has indeed widened since about the 1980s, and the COVID recession has made things worse. But it concludes low interest rates are not the real culprit.

Blame technology and globalisation

The BIS report instead emphasises the impact of technological progress and globalisation.

Technological progress, particularly in information technology, has increased the productivity and incomes of the wealthy (such as top lawyers and tech company executives). It has done little for many low income earners (such as aged care workers and restaurant staff).

Globalisation refers to the increased international trade of goods, and increasingly services. An example is corporations moving their call centres to countries where wages are lower. This has increased profitability for shareholders but eroded the bargaining power of lower skilled workers and small businesses.

A central bank can only do so much to mitigate these factors.

Interest rates and jobs

The main thing it can do is to help minimise unemployment, perhaps the most important driver of income inequality. Its tool to stimulate the economy is lower interest rates.

Lower rates means consumers have less reason to save, so they spend more. Businesses are more likely to borrow to invest. All this helps create more jobs. So higher rates would likely mean higher unemployment, making income inequality worse.