Why interest rates go up and down

Banks earn money because of interest so if you think that the interest rates because of this will always be higher, no it is not like that, it is bigger than that.

Interest rates are controlled by the central government banks in order to maintain the economic condition of the country and the people.

The interest rates changes because of mainly 2 reasons:-
1) inflation
2) employment

1)According to Wikipedia “In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.”

so when the prices go up the Central reserve Bank decreases the rates so that the people will buy fewer products of high rates which will ultimately reduce the prices of the goods.
Because there will be less demand as compared to supply the prices will go down so in this way the rates are increased in order to control the inflation.

Suppose you want to buy a house whose price is greater than last year’s price because of the inflation so in order to control the inflation and to reduce the price of that house the government will reduce the interest rates so that the people will not want to take loan from the bank because of high rates then there will be less supply of money and less demand for goods like house, so the price of house will go down in this way the inflation is controlled by increasing the rates.

2) whenever there is a low number of jobs for people than in order to get more jobs for people the government reduces interest rates.
When interest rates go down then the companies will borrow money easily in order to expand their business which will lead to job creation.
Also when the interest rates are less than common people will get loan easily to finance their things.

For example, if a person gets a home loan from a bank and then he started the construction because of the construction of his house there will be job creation for the workers, therefore, it is because of low-interest rates.

Because of low rates an individual can take loan easily in order to start his business.

Read: How interest rates affect the stock market

However, bonds and bond yields are the driving factors in the inflation.

Whenever the bond yields go up, then it is the indication of high liquidity of money in the market which will eventually increase the inflation.

Little inflation is good for the health of the country but in order to control its size. Government increases interest rates and issue new bonds in the market with higher interest rates as compared to the older one to reduce the liquidity from the market.

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Saifullah Khan

Hi there, I am the owner of gloomyworld.com, read more about me here.

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