Cheap credit may help unproductive and non-viable firms to survive for too long. 3/15  This hampers the process of creative destruction, an important driver of productivity growth and, thus, increases in living standards. Second, the low interest rate environment becomes increasingly harmful for financial institutions and poses risks for financial stability.
With interest rates declining further and retail bank deposits remaining sticky, banks’ interest margins continue to narrow, reducing their profitability. Going forward, this may reduce their willingness to lend. A related concern is that the reduced profitability prospects encourage banks and other financial institutions to take excessive risks and build up leverage.