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Title: HOW DOES RAISING INTEREST RATES CONTROL INFLATION
Description: One way of looking at rapidly rising prices — a high rate of inflation — is as an imbalance of supply and demand. By raising short-term interest rates, and by influencing rates elsewhere in the economy, the Fed is making it more expensive to borrow money.
Description: One way of looking at rapidly rising prices — a high rate of inflation — is as an imbalance of supply and demand. By raising short-term interest rates, and by influencing rates elsewhere in the economy, the Fed is making it more expensive to borrow money.
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HOW DOES RAISING INTEREST RATES CONTROL INFLATION
When central banks raise interest rates, it’s big news
...
All these actions combined tips the economy into recession
...
The extra amount you end up paying is as a result of interest rate
...
On the flip side, if you want to save money then a high interest rate means you can earn more
on your savings
...
There’s no single interest rate in the economy as
thousands of banks set their own commercial rates
...
A Central Bank is a bank for banks
...
Commercial banks have reserves
which are like their cash on hand
...
When central banks raise interest rates, they’re trying to control inflation—how fast prices
rise for everyone
...
The
change spreads through the financial system and slows down the rate of inflation
...
They might make more from keeping their money in a central bank than
lending it out and so if they do lend it out, they’ll raise their interest rates
...
Take mortgage as an example
...
If you have a variable-rate mortgage,
where the interest rate that you pay is linked to the central bank’s interest rate, the higher rate
will translate into less cash to spend on other things
...
This chain of activities
should help to lower inflation
...
People with fixed rates are protected against the direct effects of an interest rate rise but will
still feel an indirect impact
...
A rise in interest rates puts businesses in a situation where they will find it more expensive to
borrow and invest
...
What are the Risks of Raising Interest Rates?
In 1981, the Federal Reserve, America’s central bank allowed interest rates to rise to a
whopping 19%
...
It is very
difficult to get inflation under control without severely denting economic activity
...
Higher prices mean employees will need higher wages
pushing up costs for businesses
...
It can take as long as two years to see the full results from interest rate changes
...
Predicting the future
is not an easy task and thus the challenge for central banks is to try and work out whether the
inflation will fall back on its own
...
It may be a blunt instrument but raising interest rates is still central banks’ main tool for
taming inflation
...
Slowing down the economy is not fun
but it´s worth it to stay low and stable
Title: HOW DOES RAISING INTEREST RATES CONTROL INFLATION
Description: One way of looking at rapidly rising prices — a high rate of inflation — is as an imbalance of supply and demand. By raising short-term interest rates, and by influencing rates elsewhere in the economy, the Fed is making it more expensive to borrow money.
Description: One way of looking at rapidly rising prices — a high rate of inflation — is as an imbalance of supply and demand. By raising short-term interest rates, and by influencing rates elsewhere in the economy, the Fed is making it more expensive to borrow money.