And owing to the depressed business climate worldwide, our interest rates have been at historical lows and steady for a long time.
That is good for most people and commercial enterprises. Clearly, low interest rates stimulate commercial activity and raise living standards.
So one would expect that higher interest rates have the opposite effect, no?
Against most expectations, this interest rate was recently raised by 0.5 percent.
And the reason? The danger of inflation rising. And that is very interesting.
A similar situation has persisted in the euro zone as well as the US. They all want inflation to tick up.
Often inflation is due to external pressures, such as a rising oil price. Nothing the
But can an increase in the prime rate reduce inflation? Ultimately - yes. If you put it at a level of, say, 60 percent, it will kill all commercial activity and nobody will be able to buy anything, not even fuel. People will be walking to work.
And then again maybe not, because there will be no work, as nobody can afford to buy anything. But increasing it by "reasonable amounts", such as 1-2 percent, is supposed to do the trick. But does it?
Yes, it increases the cost of money, but as long as money is available people will borrow and pay the going rate. This is because they know that with increased costs, due mainly to the prime rate hike, things will get more expensive, so "let's buy it now rather".
And thus that increase leads to higher inflation. True, some people may not afford certain things any longer, but the price will go up nevertheless.
So increasing the interest rate and making it more difficult for both the individual and the economy is supposed the be the cure?
Very clever idea that. One can only hope that the cure is not worse than the illness!
Maybe someone clever can explain the logic behind this interest rate play.
It doesn't make much sense to me. And while you are at it, include the impact of money supply levels on the interest rate.
Most Popular Stories
- Obama, Ukraine Discuss Russian Incursion in Crimea
- Chinese May Have Spotted Malaysia Airlines Debris
- Social Media Causee Sleep Deprivation in Students
- First-time Jobless Claims Drop Unexpectedly
- Banks Buying Little From Minority Firms: Study
- General Electric Plans IPO of Credit Card Unit
- SXSW Crash Kills 2, Injures 23
- U.S. Business Inventories Up, Retail Sales Down
- 'Candy Crush' Maker Files IPO
- First-time U.S. Jobless Claims Hit 3-month Low