interest rates is extended to those economic entities that have not suffered any damage to their balance sheets. if they bring forward future demand to the present by taking advantage of a low interest rate environment, this leads to an increase in aggregate demand. as balance - sheet adjustment continues for a long period of time, however, the amount of future demand that could be brought forward gradually diminishes even in a low interest rate environment. the above - mentioned cost of reducing incentives to lessen excess debt is not only an issue for private economic entities but also for the government. once the increased level of government debt is perceived to be unsustainable, this threatens both price stability and financial system stability, as in the case of the european debt problem. the second aspect is the impact of low interest rates on the supply side of the economy. if low interest rates induce investment projects that are only profitable at such interest rate levels, this could have an adverse impact on productivity and growth potential of the economy by making resource allocation inefficient. while central banks have typically conducted monetary policy by treating a potential growth rate as exogenously given, when the economy is under prolonged shocks arising from balance - sheet repair, we may have to take into account the risk that a continuation of low interest rates will affect the productivity of the overall economy and lower the potential growth rate endogenously. the third aspect is the impact on financial intermediaries. the effect of monetary easing usually materializes when firms and households increase their expenditures, induced by low interest rates. within that process, we should bear in mind that there are financial intermediaries and financial markets that connect monetary policy conducted by the central bank with firms and households. once such intermediaries stop functioning properly, we can no longer expect to see a successful transmission of monetary easing. maturity transformation is an important intermediation function of banks, which benefit from the spread between short - and long - term interest rates. monetary easing widens this spread and increases the interest margins of financial intermediaries. this is one of the monetary transmission mechanisms that enhance the stimulative effect on the economy through the banking sector. beyond a certain threshold, however, further monetary easing could instead squeeze the margins and discourage financial intermediation, resulting in lower efficiency in resource allocation and lower growth potential in the long run. a similar problem arises for institutional investors in the form of a negative spread – that is, investment returns on assets fall below the promised return on

thomas jordan : low interest rates – blessing or curse? summary of a speech by mr thomas jordan, member of the governing board of the swiss national bank, at the delegiertenversammlung des hev schweiz, santis, 19 june 2009. the complete speech can be found in german on the swiss national bank ’ s website ( www. snb. ch ). * * * monetary policy uses low interest rates to try and stimulate demand as a way of combating the economic crisis. the property market is an important transmission channel in this regard, as low mortgage rates provide direct relief to home owners and tenants in the form of lower interest payments and rents. this provides households with greater room for manoeuvre in consumption and investment. this in turn boosts overall economic demand and economic growth. however, despite these direct positive effects, a low level of interest rates can also pose medium - term risks for the stability of the swiss property market, and hence the financial system. the past has repeatedly shown that prolonged periods of low interest rates can lead to speculation on property markets, and to declining standards in mortgage lending. the challenge in today ’ s difficult environment is how to boost the economy through low interest rates without creating medium - term risks for the stability of the financial system and the property market. responsible behaviour on the part of home owners, combined with bank discipline when granting loans, can contain these risks. households should buy property only if they would also be able to afford it if interest rates increased. moreover, they should finance their house purchase with a sufficient proportion of equity. equity acts as a cushion, absorbing movements in property prices. in addition, banks should use discipline in lending practices, even in an environment of low interest rates. the prime considerations when granting loans should be the observance of maximum loan - to - value ratios and a conservative valuation of property.