interest rate

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Most economists regard the interest rate solely as a policy lever to be used for controlling inflation.

Economics made simple: 10 experts on where the cost of living crisis came fro…

1. Trying to control inflation

You can use interest rates as a way to nudge people into certain behaviours, in an attempt to alter the rate of inflation.

1.1. If inflation is too low

  • interest rates are decreased
  • to get people to borrow and to spend
  • in theory: boosts economic growth -> inflation goes up

Thus, when inflation falls below the central bank’s target, which in most developed countries is set at 2%, interest rates come down and stay down. Low rates encourage individuals, companies and countries to borrow, and to spend, boosting economic growth. This is what happened over the past decade.

Economics made simple: 10 experts on where the cost of living crisis came fro…

1.2. If inflation is too high

  • interest rates are increased
  • to get people to save rather than to spend or borrow
  • in theory: demand for goods goes down -> prices go down -> inflation goes down

But when inflation climbs above the target level, as it has done in recent months, rates are hiked, incentivising saving, rather than spending or borrowing. In theory, as demand for goods falls, so do prices, bringing down inflation.

Economics made simple: 10 experts on where the cost of living crisis came fro…

2. Interest rates and recession

The Bank usually hates to put rates up if it thinks a recession is coming, because doing so makes one more likely.

Friday briefing: What the interest rate spike means for the country – and for…

3. Elsewhere

3.1. In my garden

Notes that link to this note (AKA backlinks).

3.2. In the Agora

3.3. Mentions

This page last updated: 2022-08-05 Fri 18:07. Map. Recent changes. Source. Peer Production License.