By What Mechanism Are Interest Rates Connected To Inflation?
In September 20008 the Bank of England Monetary Policy Committee decided not to drop interest rates because of high inflation. I don't understand the connection between interest rates and inflation. If businesses are in debt, won't high interest rates drive costs of goods up even more?
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Basically interest have a direct impact on inflation. Interest rates are offered on loans and the increase in interest rates increases the cost of loans. This makes the borrowing costly. When the interest rate drops, then consumer spending increases. This stimulates the economic growth. When there is an increase in economic growth then inflation increases. Inflation increases as the money supply increases. This shows that when the interest rates falls inflation goes up.
Now, the bank of England has decided not to drop interest rates further because if it one hand, can increase the investments then at the other hand it will increase the inflation as well. As there is already enough inflation therefore, they have decided not to drop interest rates.
Now, the bank of England has decided not to drop interest rates further because if it one hand, can increase the investments then at the other hand it will increase the inflation as well. As there is already enough inflation therefore, they have decided not to drop interest rates.
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