Rock-bottom rates have gone global to a much greater extent than after the financial crisis of 2007-09—and many central banks have committed themselves to keeping them low
English cricket fans know the Aussies are loth to surrender a lead. For much of the past two decades, Australia has been a high interest-rate economy. But not any more. In March the Reserve Bank of Australia cut its benchmark cash rate to 0.25%. That is the lowest interest rates have ever gone, and as low as they are likely to go. To signal its intentions that rates will stay put, theThe Australian case is telling. Near-zero interest rates are the norm in rich countries.
Now put our hypothetical country in a zero-interest-rate world. Assume its exports are split between raw materials and manufacturing goods. And imagine an economic shock that lowers the demand for commodities. Our country’s exchange rate would fall, helping boost demand for its manufactures. Were interest rates positive, the central bank could cut them to fire up domestic spending and make up for the shortfall of raw-material exports. But at zero interest rates, this is not possible.
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