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:
“One of the many reasons for the bewildering and tragic character of human existence is the fact that social organization is at once necessary and fatal. Men are forever creating such organizations for their own convenience and forever finding themselves the victims of their home-made monsters.”
—Aldous Huxley (1894–1963)
“As if her velvet helmet high
Did turret rationality.
She fans her wing up to the winde
As if her Pettycoate were lin’de
With reasons fleece, and hoises saile
And humming flies in thankfull gaile”
—Edward Taylor (1645–1729)
“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)
“You are more than entitled not to know what the word ‘performative’ means. It is a new word and an ugly word, and perhaps it does not mean anything very much. But at any rate there is one thing in its favor, it is not a profound word.”
—J.L. (John Langshaw)
“Men must be capable of imagining and executing and insisting on social change if they are to reform or even maintain civilization, and capable too of furnishing the rebellion which is sometimes necessary if society is not to perish of immobility.”
—Rebecca West (1892–1983)