What does “0% interest rate” mean and how does it help the economy?
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The standard theory is that individuals are rational with their money. Each person makes decisions to save for the future or spend in the present. To counter inflation, their savings must grow usually at some interest (zero risk like savings acct in bank) or returns on some kind of investment which means taking some investment risk. Lower interest rates means that
a) people will be less likely to save and more likely to spend as their savings are growing slower. This spending stimulates economy – buying cars, going to movies, eating out more etc.
b) people who still save will be more inclined to take risks in investments rather than accept a lower interest. The most common means of investing is in assets (shares, property etc) and this more buyers tends to push asset prices higher.
c) companies make similar decisions. With lower interest rates, companies will favor investments in productive capacity because even at lower profit margins it makes more sense to invest and borrow. This investment stimulates the economy (hiring more people, buying equipment etc)
The downside to very low interest rates is that too much increased spending leads to inflation where instead of getting more stuff for the spending, things just get more expensive. This is very bad for people with fixed incomes. A lot of the investments also get riskier which means it is now much more sensitive to any disruption.
Zero percent interest is a headline statement. For many years, it was thought that there could never be a state of zero interest, ie it was a theoretical limit rather than anything that could actually happen. The thinking was that if interest rates dropped too low, inflation would very quickly destroy the currency/economy and therefore make interest rates irrelevant.
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