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OECD warns of negative impact of low interest rates and government policies on economic growth

OECD

​The Organisation for Economic Co-operation and Development (OECD) has warned that permanently low interest rates are having a substantially negative impact on investments and savings.

The implementation of low rates is a policy largely designed to provide a much-needed emergency boost to economies in desperate need of a boost, but a recent study from the OECD claims they have been in place for too long and are proving to be doing more harm than good.

The organisation claims that in order to promote the growth of innovative companies and ensure there is no further economic stagnation, governments around the world need to make the difficult decision to allow badly performing companies to go bust.

A number of the economic problems to be highlighted by the OECD have reportedly been brought to light on the back of a halt to growth in the commodities market, which has seen oil prices and other natural materials take a hit in recent months.

Commodities have often been credited as being one of the key drivers in the performance of the global economy, particularly within emerging markets, with an excess supply sparking a decline in prices that has largely harmed investment and, as a result, the wider economy.

The OECD now believes that policies need to change in order to spark a recovery to restore investment and productivity growth.

“Seven years of extremely easy monetary policy has not restored the investment and productivity growth needed to raise income per head, real wages, demand and growth,” said the OECD.

“This policy was originally designed to stabilise the financial system and support economic recovery, but somehow has slipped into trying to compensate for the absence of the other policies that are needed.”

The OECD believes that low interest rates will continue to harm emerging economies as well as richer nations, with the latter largely seeing lending subjected to tighter rules on the back of the recent financial crisis.

It added that until higher interest rates are imposed, investors will soon be concentrated within a “barbell” pattern of very low risk and very high risk investments, while there will be little in between to finance the growth of companies that do not fit that pattern.

The OECD report added that an interest rate rise driven productivity, rather than inflation, was essential to recovery.

However, it warned that vital reforms were unlikely to emerge any time soon, meaning that low interest rates and low productivity rates were likely for the foreseeable future.

The report continued: “Unfortunately structural reform on the scale required is unlikely in the near term. This means that creative destruction and a lift-off in rates is postponed. Central banks are most likely to continue with low interest rates and the quantitative easing approach.”​