Why Interest rates rise & Decreased

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Why Interest rate rises & Decreased in the world of finance we must understand 

A central bank typically increases interest rates as a tool to control inflation, essentially making borrowing more expensive and discouraging excessive spending when the economy is overheating, leading to a decrease in demand and potentially lower price increases; this is done by influencing the cost of loans that commercial banks provide to individuals and businesses. 

Key points about interest rate increases: 

• Combatting inflation:

  The primary reason for raising interest rates is to manage high inflation levels, as higher rates can slow down economic activity and put downward pressure on prices. 

  
  

  Supply and demand of credit:
• When demand for loans is high or the supply of credit is limited, interest rates tend to rise. 

  
  

  Central bank policy:
• Central banks like the Federal Reserve directly influence interest rates by adjusting the rates they charge to commercial banks for overnight loans.

  
  

  Economic impact:
• Higher interest rates can discourage borrowing for large purchases like homes and cars, potentially slowing down economic growth. 

  
  

  Who benefits from higher interest rates? 

• Savers:

  Individuals with savings accounts may earn higher returns when interest rates rise. 

  
  

  Lending institutions:
• Banks and other lenders can profit from charging higher interest rates on loans. 

  
  

  Now lets understand Why interest rest decrease

  
  

  
  

  Interest rates decrease when there is a low demand for credit or a high supply of money in the market, which typically happens when the economy is slowing down, leading central banks to lower rates to stimulate borrowing and economic activity; essentially, when people are less likely to borrow money, lenders lower interest rates to incentivise them to do so. 

  
  

  Key points about interest rate decreases: 

  • Economic slowdown:

    When the economy is sluggish, businesses and individuals borrow less, causing a decrease in demand for credit, which leads to lower interest rates. 

    
    

    Central bank policy:
  • Central banks like the Federal Reserve can intentionally lower interest rates by manipulating the money supply to stimulate the economy during a downturn. 

    
    

    Inflation concerns:
  • If inflation is low, central banks may lower interest rates to encourage spending and boost inflation to a desired level. 

    
    

    Increased savings:
  • When people save more money, the supply of available credit increases, putting downward pressure on interest rates

    
    

    
    

    Why factor should be all ways there  

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