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:
“There may be other reasons for a man’s not speaking in publick than want of resolution: he may have nothing to say.”
—Samuel Johnson (1709–1784)
“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)
“For that’s what a woman, a mother wants—to teach her children to take an interest in life. She knows it’s safer for them to be interested in other people’s happiness than to believe in their own.”
—Marguerite Duras (b. 1914)
“At the rate science proceeds, rockets and missiles will one day seem like buffalo—slow, endangered grazers in the black pasture of outer space.”
—Bernard Cooper (b. 1936)
“How vigilant we are! determined not to live by faith if we can avoid it; all the day long on the alert, at night we unwillingly say our prayers and commit ourselves to uncertainties. So thoroughly and sincerely are we compelled to live, reverencing our life, and denying the possibility of change. This is the only way, we say; but there are as many ways as there can be drawn radii from one centre. All change is a miracle to contemplate; but it is a miracle which is taking place every instant.”
—Henry David Thoreau (1817–1862)