reduce or eliminate the incentives to buy/hold (interest rates)

The interest rate has been 0% for a long time.

Why doesn't it increase? Whether we use bias or use a conversion function, more SBDs will be created

Because it is a conversion. STEEM is converted into SBD which means STEEM is destroyed and SBD is created, so the net inflation is zero. A conversion from STEEM to SBD and back to STEEM would result in the same amount of STEEM that we started with (assuming no price change, or alternately, averaged across the range of positive and negative price changes). That is not the case for a bias, which permanently prints and distributes more rewards (because the blockchain in that case believes, incorrectly, that its market cap is higher and can therefore 'afford' to distribute more according to the predetermined schedule, currently about 9%/year).

Overall it is not a well-targeted method for dealing with the SBD value due to this distorting of the assumed market cap and the resulting permanent net increase in rewards/inflation. It also screws over people who perform conversions from SBD to STEEM by shorting them on the STEEM received (since it is assumed to have a higher price). Of course, no one should rationally be doing these conversions now, since it converts a $6 SBD into 1 USD worth of STEEM, but some users have anyway. This has become less of an issue now that SBD conversion was removed from the GUI.

The undesirable side-effects are the reason most witnesses and stakeholders don't support it.