You're the CFO of an industrial company in Madrid. The central bank keeps rates low and your team reads it as a green light: "cheap money, let's invest at full tilt." But a low rate doesn't mean the same thing in an economy with slack as in an overheated one. The same figure can be an appropriate stance… or a ticking time bomb. Your job is to diagnose which.
The situation
Monetary policy stance isn't the level of the rate, but the rate relative to the neutral rate —the one that neither stimulates nor restrains. And the neutral rate rises with the economy's temperature (the output gap: how far above or below potential it is). That's why a 1% rate can be restrictive in a deep recession (the neutral rate is negative, as Japan taught us) and highly expansionary in an overheated economy (the neutral rate is high).
Here's the trap tempting your team. "Low rate = invest" reads the headline, not the stance. When the economy is cold and slack, cheap money underpins a genuine recovery: demand has room to run. When it's overheated and money is still cheap, you're at an unsustainable stimulus peak: rate hikes and inflation are coming, and today's demand is borrowed from the future. The lesson from the ECB's QE and the U.S.'s deficit-financed spending is that stimulus isn't permanent. Diagnose the stance against the cycle: what you should do with a low rate depends on where the economy stands.