There is a fundamental divide between the borrowers and lenders, between savers and consumers. The savers and lenders often represent the moral rectitude of being careful with spending and providing for the rainy day. The creditors are often given a negative moral view. Spend today through borrowing and put off into the future how it will be paid for.
This question of borrower and lender behavior is closely tied to the price of credit. If the price of credit is too low, it will be viewed as cheap and will be used excessively. There should not a be a moral association with cheap credit. It is just a price. If you can borrow at a low price, do it. Nevertheless, changes in the price of credit will change incentives and if the central bank can change the price of credit, it will change incentives.
Hence, there is a potential moral hazard problem. Moral hazard can mean that parties will take on more risk under the view that the terms of a debt deal will later change. The debt problem associated with rates has been twofold. One, many borrowers expected rate to remain low for much longer. The normalization of rates came as a surprise. Two, now that rates have risen to higher levels, there is the expectation that the central bank will return rates to a lower level, one below the historic norms, to save borrowers from the ravages of higher debt costs.
Borrowers can expect rates to decline, but their behavior should not be predicated on the notion that central banks will bring down rates to provide a lending bail-out. This moral hazard problem can apply to households, corporations, and governments. Borrowing should only be done based on the ability of a project to cover the expenses at current rates and not based on a belief that relief will come in the future for those who are willing to take the risk.
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