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:
“I should like to know what is the proper function of women, if it is not to make reasons for husbands to stay at home, and still stronger reasons for bachelors to go out.”
—George Eliot [Mary Ann (or Marian)
“With what reason remains he reasons ill.”
—Samuel Beckett (1906–1989)
“Those people have no real interest in a science who only begin to get excited about it when they themselves have made discoveries in it.”
—Friedrich Nietzsche (1844–1900)
“Strange that the vanity which accompanies beauty—excusable, perhaps, when there is such great beauty, or at any rate understandable—should persist after the beauty was gone.”
—Mary A. [Elizabeth, Countess Von] Arnim (1866–1941)
“[T]here is no Part of the World where Servants have those Privileges and Advantages as in England: They have no where else such plentiful Diet, large Wages, or indulgent Liberty: There is no place wherein they labour less, and yet where they are so little respectful, more wasteful, more negligent, or where they so frequently change their Masters.”
—Richard Steele (1672–1729)