Deprecated (16384): The ArrayAccess methods will be removed in 4.0.0.Use getParam(), getData() and getQuery() instead. - /home/brlfuser/public_html/src/Controller/ArtileDetailController.php, line: 73
 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php. [CORE/src/Core/functions.php, line 311]
Deprecated (16384): The ArrayAccess methods will be removed in 4.0.0.Use getParam(), getData() and getQuery() instead. - /home/brlfuser/public_html/src/Controller/ArtileDetailController.php, line: 74
 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php. [CORE/src/Core/functions.php, line 311]
Warning (512): Unable to emit headers. Headers sent in file=/home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php line=853 [CORE/src/Http/ResponseEmitter.php, line 48]
Warning (2): Cannot modify header information - headers already sent by (output started at /home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php:853) [CORE/src/Http/ResponseEmitter.php, line 148]
Warning (2): Cannot modify header information - headers already sent by (output started at /home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php:853) [CORE/src/Http/ResponseEmitter.php, line 181]
Notice (8): Undefined variable: urlPrefix [APP/Template/Layout/printlayout.ctp, line 8]latest-news-updates/rationale-behind-raising-interest-rates-sashwath-swaminathan-nd-anand-srinivasan.html"/> LATEST NEWS UPDATES | Rationale behind raising interest rates -Sashwath Swaminathan nd Anand Srinivasan | Im4change.org
Resource centre on India's rural distress
 
 

Rationale behind raising interest rates -Sashwath Swaminathan nd Anand Srinivasan

-The Hindu

A critical facet of the consequences of an interest rate increase is the correction of asset prices. Interest rates act as gravity to stock market prices

The Federal Reserve and other central banks around the world have raised interest rates to curb inflation. The rationale behind raising interest rates is that the cost of borrowing rises whenever they are raised, and the incentive to save and invest rather than consume increases due to better yields.

It becomes more expensive to consume rather than save for the future as interest rates are higher. Therefore, the demand for goods reduces, leading to a drop in their prices. This leads to a reduction in wages being paid and a sustained drop in price levels which theoretically forestalls an inflationary spiral.

Raising rates is the first tool for monetary intervention as it is the quickest way to drain excess liquidity in the market. When interest rates go up, real rates also rise, leading to the burden on the borrower increasing in real terms.

Banks operate using a fractional reserve banking system wherein an initial amount of deposit grows multifold due to loans issued using the deposit. However, when rates are raised, this system of monetary expansion works in the opposite manner, contracting exponentially when debt is paid off or defaulted.

Moreover, new loans are more expensive, and therefore, new borrowing slows down, decreasing inflationary pressures regardless of debt defaults or settlements. Another critical facet is the correction of asset prices. Interest rates act as gravity to stock prices. The main reason why stock prices drop when rates rise is due to lower consumption and, therefore, a nominal decline in profit.

Please click here to read more.