Reasons For Interest Rate Change
- Political short-term gain: Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates.
- Deferred consumption: When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.
- Inflationary expectations: Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.
- Alternative investments: The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments effectively compete for funds.
- Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.
- Liquidity preference: People prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time or money to realize.
- Taxes: Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss.
Read more about this topic: Interest Rate
Famous quotes containing the words reasons for, reasons, interest, rate and/or change:
“It seems to me that we have to draw the line in sibling rivalry whenever rivalry goes out of bounds into destructive behavior of a physical or verbal kind. The principle needs to be this: Whatever the reasons for your feelings you will have to find civilized solutions.”
—Selma H. Fraiberg (20th century)
“Man has lost the basic skill of the ape, the ability to scratch its back. Which gave it extraordinary independence, and the liberty to associate for reasons other than the need for mutual back-scratching.”
—Jean Baudrillard (b. 1929)
“A mob cannot be a permanency: everybody’s interest requires that it should not exist, and only justice satisfies all.”
—Ralph Waldo Emerson (1803–1882)
“We all run on two clocks. One is the outside clock, which ticks away our decades and brings us ceaselessly to the dry season. The other is the inside clock, where you are your own timekeeper and determine your own chronology, your own internal weather and your own rate of living. Sometimes the inner clock runs itself out long before the outer one, and you see a dead man going through the motions of living.”
—Max Lerner (b. 1902)
“If we are to change our world view, images have to change. The artist now has a very important job to do. He’s not a little peripheral figure entertaining rich people, he’s really needed.”
—David Hockney (b. 1937)