How Do Interest Rates Affect the Economy 2021?
This variable affects both consumers, businesses and the economy as a whole in many ways.
Consumers feel the impact of interest rates especially in cases of using loans and buying homes. In the case of businesses, too, interest rates influence critical decisions about financing inventory or making new investments.
So how does falling or rising interest rates affect the economy? What you need to know about the effects of interest rates on the economy.
Interest Rate Determinants
Interest rates are determined according to money supply and demand, which is affected by various market forces. The most important of these is the policy actions of the Central Bank, which actively manages the rates banks pay when they need money.
Borrowing is inevitable for almost any bank whose reserves fall below the desired level. Banks can borrow whenever they need, and the Central Bank sets interest rates for these loans. When interest rates rise, banks reflect these to their customers.
A decrease or increase in interest rates does not have a very instantaneous effect.
Rising Interest Rates
Increasing interest rates increase the cost of borrowing, thus reducing the amount of borrowing. Rising interest rates affect loans. For example, those who want to buy housing on credit find it more expensive to borrow.
As people see that they can earn higher returns on their savings, savings rates across the country can be expected to increase. Because people who want to start a business or buy a house may prefer to put the money in banks and make a living with a labor-free and risk-free return.
Likewise, businesses find borrowing expensive; They may reduce their investments in order to pay off their debts or be more hesitant about making new investments. This can hurt commercial sales; production may decrease, employment problems may occur, and all of these can eventually cause the economy to slow down. Therefore, the role of interest rates in the economy is quite important.
Falling Interest Rates
When interest rates fall, people make less effort to save, so there is no incentive. Because borrowing becomes more affordable. Thus, it can be expected that both consumers and businesses will increase their debt.
With higher consumer and business spending, lower interest rates for the national economy occur. Low interest rates come with low interest rates that lower monthly loan payments. If the economy is weak or there is a recession, it can be expected that the Central Bank will reduce interest rates to stimulate growth.