Technically low interest rates are a response to low inflation. The point is that the interest rate moderates saving (in the general sense of deferred consumption) and investment.
If there are plenty of investments then limited resources won't allow you to do all of them, otherwise we would have grown our economy all at once in a single year. The interest rate is compensation for deferring consumption. i.e. you are being compensated for the opportunity cost of not spending money on consumption. The interest rate goes up in response to the profitability of investments. If I can earn a 8% every year then I am willing to take a 5% loan. Inflation makes investments appear more profitable than they are so the interest rate has to be raised according to inflation.
Well, ignoring 2020 and 2021 inflation was really really low to begin with. It's been at 2% at most. When inflation is low, interest rates can't go much higher. The fact that interest rates have gone down all the way to 0% (especially in Europe and Japan) without causing any meaningful inflation tells us that the interest rate is still too high to attract borrowers.
If one really wants to know whether interest rates drive inflation one must precisely define the term "low interest rate" because it's all relative. It's relative to inflation, it's relative to investment profitability and relative to how many people are deferring consumption (aka saving). Just because 0% is a really low number doesn't mean it's low enough to cause inflation.
From what I have heard (i.e. I don't know if it's true), large businesses are being overfunded and small businesses underfunded with loans. It's entirely possible that some structural reason is preventing lending that is completely inelastic to the interest rate.
If there are plenty of investments then limited resources won't allow you to do all of them, otherwise we would have grown our economy all at once in a single year. The interest rate is compensation for deferring consumption. i.e. you are being compensated for the opportunity cost of not spending money on consumption. The interest rate goes up in response to the profitability of investments. If I can earn a 8% every year then I am willing to take a 5% loan. Inflation makes investments appear more profitable than they are so the interest rate has to be raised according to inflation.
Well, ignoring 2020 and 2021 inflation was really really low to begin with. It's been at 2% at most. When inflation is low, interest rates can't go much higher. The fact that interest rates have gone down all the way to 0% (especially in Europe and Japan) without causing any meaningful inflation tells us that the interest rate is still too high to attract borrowers.
If one really wants to know whether interest rates drive inflation one must precisely define the term "low interest rate" because it's all relative. It's relative to inflation, it's relative to investment profitability and relative to how many people are deferring consumption (aka saving). Just because 0% is a really low number doesn't mean it's low enough to cause inflation.
From what I have heard (i.e. I don't know if it's true), large businesses are being overfunded and small businesses underfunded with loans. It's entirely possible that some structural reason is preventing lending that is completely inelastic to the interest rate.