why should high interest rates keep shoppers out of the stores and/or
conversely why should high consumer spending reduce the need for the
Bank of England to raise interest rates?Hi! Thanks for the question.
Our first two articles will mainly reference the Federal Reserve of
the USA which is the counterpart of the Bank of England in Britain. We
will take a look on how it uses interest rates to control consumer
spending and the economy which we will see later from the Bank of
England website is the same action they take in their monetary policy.
But first here is the basic idea. Higher interest rates will mean that
the cost of borrowing money will be high so it discourages people to
make loans and then spend them so they troop less to the stores.
Conversely if the interest rate is low people will be encouraged to
make loans to purchase items or even homes and cars. So why does the
Federal Reserve or the Bank of England do such things? They are
actually looking at the bigger picture here which is the nation?s
economy.
?The Fed's primary control is in the raising and lowering of
short-term interest rates. In doing this, the Fed can indirectly
influence demand, which then influences the economy. For example, if
interest rates are lowered, borrowing money to make purchases becomes
less expensive, and people are more motivated to spend money because
they can get a better deal on the loan. Spending money, in turn,
stimulates economic growth, which is what the Fed is trying to do in
that instance. If there is too much money in the economy, however,
people spend more money and demand increases at a faster rate than
supply can match. Prices rise too quickly because of the shortage of
products, and inflation results. If there is too little money in the
economy, people don't have excess spending money, and there is little
economic growth.?
?The Fed watches economic indicators closely to determine in which the
direction the economy is going. By forecasting increases in inflation
or slow-downs in the economy, the Fed knows whether to increase or
decrease the supply of money.?
?How the Fed Works?
http://money.howstuffworks.com/fed.htm/printable
?Changes in real interest rates affect the public's demand for goods
and services mainly by altering borrowing costs, the availability of
bank loans, the wealth of households, and foreign exchange rates.?
?For example, a decrease in real interest rates lowers the cost of
borrowing; that leads businesses to increase investment spending, and
it leads households to buy durable goods, such as autos and new
homes.?
?In addition, lower real rates and a healthy economy may increase
banks' willingness to lend to businesses and households. This may
increase spending, especially by smaller borrowers who have few
sources of credit other than banks.?
?US Monetary Policy: How it Affects the Economy?
http://www.frbsf.org/publications/federalreserve/monetary/affect.html
As regards the Bank of England, it says generally the same thing about
interest rates and monetary policy.
?If the demand for goods and services grows faster than the country's
ability to supply items, prices rise and inflation occurs. The
objective of monetary policy is to maintain overall price stability.
Some prices may go up, some may go down, but if the general price
level of goods and services is unchanged, then money keeps its value.
Stable prices help people to make well-informed, rational decisions
about whether to save or borrow, to invest or consume, and what and
when to produce.?
?The Bank of England influences the cost of money by altering the
short-term nominal interest rate. It sets an interest rate for its own
dealings with the market, which in turn affects the rates set by banks
for savers and borrowers as already explained but, this also affects
the prices of assets such as shares and property, consumer and
business demand, and output and employment.?
?If interest rates are too low, this may encourage too much borrowing
and spending and result in the emergence of inflationary pressures. If
interest rates are too high, this may discourage borrowing and
spending. That will help bring inflation down but may temporarily
reduce output and employment.?
?Core Purposes?
http://www.bankofengland.co.uk/Links/setframe.html
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Regards,
Easterangel-ga
Google Answers ResearcherHello tallahas,
The recent increase of .25 percentage points, brining the current UK
base rate to 4% was done on advice from Gordon Brown's economic
advisor. It is correctly suggested that lower interest rates
encourage consumer borrowing and debt, which in turn increases the
amount of consumer cash available to spend. By increasing the base
rate, borrowing becomes more costly (and hopefully less appealing) and
therefore decreases the amount of consumer money available to spend,
subsequently decreasing rates.
The ideal situation would be that consumers have enough guidance and
knowledge to know that high borrowing is not preferable. This would
allow the BoE to set the rates low (allowing property to appreciate in
value) with the assurance that consumer secondary borrowing (loans and
credit cards) will not increase.
High consumer spending will never result in lower rates UNLESS the
spending is from non borrowed monies, ie If consumer spending
increases but borrowing doesn't then there is no need to raise rates,
however we know this is not possible as the treasury is always knowing
exactly what value of currency is in circulation.
I hope this helps a bit!?
Cheers,
Tuneman?
UK Economist / "Bling Bling" ExpertThanks for the 5 stars and for the tip! :)#If you have any other info about this subject , Please add it free.# |
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Filed under: xn--qi1a.com — cfz @ January 5, 2009 edit