What causes interest rate inflate and what are the purposes of rising it?

Question

What causes interest rate inflate and what are the purposes of rising it?

Answer 1

there can be many underlying reasons for it but ultimately if the bank of england increases the base rate then generally although not always banks will follow. the bank of england usually does that to lower the amount of borrowing and so to check inflation. remember though that although the cost of borrowing increases then so does the interest you are getting on your savings. it's also worthwhile remembering that the cost of borrowing (eg a mortgage) can be off set by your savings. whether it's worth doing or not depends on the level of borrowing you have and the size of your savings

Answer 2

The interest rate is set by the federal government and is referred to as "prime."  The interest rates for car loans, home loans, credit cards and corporations are all set based on the prime rate.  The current prime rate is 5%.  Your credit card may be 10% which would be prime plus 5%.  That allows their rates to change with the change in the prime rate.  What percent your loan is over or under prime is determined by your credit score.

The government changes the prime rate to try to encourage spending or to try to curb inflation.  A lower interest rate will cause more people to borrow money.  More people borrowing money will make the American dollar worth less on the international market but it will boost sales and construction here.  The opposite is also true.  Fewer people borrowing money (read: spending money they don't have) will make the American dollar worth more on the international level.

A stronger dollar makes the country stronger--we can buy more oil for less money, a BMW costs less, etc.  Imports are cheaper if the dollar is stronger.

Changing the interest rate people borrow money with makes the money they borrow more expensive or less expensive and that makes people spend more or less money and that controls how much the dollar is worth on the international market.

The dollar right now is very weak, but spending in America is also very weak.  The current prime rate of 5% is historically very low.  4% is the lowest it has been in the last 10 years, that was in 2001.  The highest it has been was about two years ago it hit 9.5%.  The government saw the downturn we are in now coming as people were rapidly buying more than they could afford and that's what the government did to try to stop it.

There's your crash course in Macro Economics 101--actually that was more like 202.

Answer 3

There are millions of different applications for interest rates. Ultimately, raising it gives you or someone you are paying more money based on what you have or owe.

Answer 4

The Bank of England as the UK Central Bank use interest rate to control the monetary policies and currency supply of the country. To raise it will make the value of the currency more expansive in terms of other world curriencies. We can import more goods and services from other countries and sell them cheaper to the people. But our exports of goods and services will become more expensive to our importing countries. This may effect our balance of payment account with other countries.

Answer 5

In current political thinking, interest rates are used as means to control inflation. This is called monetarism, and is different from the 70s socialist doctrine of Keynesian economics, where taxation was used to control inflation. But the premise of both is basically the same.

Inflation is primarily caused by an excessive supply of money, and the way to control it is to take some of people's money away.

Higher interest rates hit borrowers, mortgages become more expensive. Millions have less to spend and it should lead to a reduction prices, or at least a slowing of the rate at which prices increase.

The UK government sets the inflation target at 2%, and the Bank of England Monetary Policy Committee attempt to meet this target by setting interest rates to achieve it. It has worked okay for around 10 years, but is starting to go a little wayward.

Using taxation as a means to this end, it is argued, hits more people harder, and is politically not now the preferred method.

One of the major domestic factors in rising inflation is wage increases which are above the rate of inflation. This causes an inflationary spiral.