As generally known to all of us, inflation is a situation where there is too much demand, but limited supply. Let say, money is not a problem for us, and we can afford anything, and demanding the same thing at the same time, which will cause the supply to be limited, thus, the price will increase.
Interest rate is the amount of money charged when we borrow money from the bank. Be it a credit card loan, personal loan, car loan, mortgage etc. are bound to the interest rate. There are indeed, many types of interest rate.
Who control the interest rate? It is the Central Bank (in Malaysia it is the BNM) to determine the value of it. In what situation the central bank will decide to reduce or increase the interest rate? It is according to current economic condition, whether they need to increase the supply of money or reduce it. (If not interested, please stop here.....)
By controlling the interest rate, the Central Bank (Gov.) may control inflation. If the inflation is high (More money than supply), the Central Bank will increase the interest rate. This means borrowing money become more expensive. As an example, would you want to buy a new house if the interest rate is, let say 15% per annum? Of course you will avoid borrowing money.
On the other hand, if the interest rate is higher, we will be encouraged to save and keep our money. Which mean, we spend less (reduce the circulation of money over something limited), and when customer spending reduce, inflation will reduce also.
So here we can conclude that, high interest rate tends to keep inflation lower, and low interest rate tends to drive inflation higher. Increased the interest rate will result in lower customer spending and vice versa.
Economic growth shows how much the overall economy progressing over a period of time. In order for it to have a positive growth, customer spending (Demand) must grow. The consumers have to buy product, then only production will occurs. This in return will generate income for the government and to the people and boost the economy. The cycle continues.
So we can see that, interest rate, inflation, economic growth is interconnected. When the government increase the interest rate, inflation could go lower with customer spending reducing, thus economic growth will also reduced.
Anyway, if the government reduces the interest rate, it will be easier for people to borrow money and depositing money into the bank is not attractive anymore, which in turn will drive the inflation higher. But because supply of money has increased, customer spending (Demand) also increased thus will lead to a higher economic growth.
So, when the BNM decided to leave its key overnight policy rate unchanged at 3.50 pct, I think they were worried about the economy growth as well as the inflation. They believed the 3.5% rate still supportive to the economic growth. As we all know, the government projecting an economic growth target at 5% - 6%. Their hands were tied up. Any movement will result on the inflation or growth to further deteriorate.
Recession happens when the economic growth (GDP) become negative. A country with possible threat of recession, will usually acts by reducing the interest rate to stimulate customer spending and to prevent the stock market from further stumbling. But, they are facing the threat of higher inflation.
One more correlation we can learn here. Reducing the interest rate indirectly may bring the stock market price higher. Because company can borrow money at low cost to expand their business. This in turn will boost the economy growth, and vice versa.
Interest rate is the amount of money charged when we borrow money from the bank. Be it a credit card loan, personal loan, car loan, mortgage etc. are bound to the interest rate. There are indeed, many types of interest rate.
Who control the interest rate? It is the Central Bank (in Malaysia it is the BNM) to determine the value of it. In what situation the central bank will decide to reduce or increase the interest rate? It is according to current economic condition, whether they need to increase the supply of money or reduce it. (If not interested, please stop here.....)
By controlling the interest rate, the Central Bank (Gov.) may control inflation. If the inflation is high (More money than supply), the Central Bank will increase the interest rate. This means borrowing money become more expensive. As an example, would you want to buy a new house if the interest rate is, let say 15% per annum? Of course you will avoid borrowing money.
On the other hand, if the interest rate is higher, we will be encouraged to save and keep our money. Which mean, we spend less (reduce the circulation of money over something limited), and when customer spending reduce, inflation will reduce also.
So here we can conclude that, high interest rate tends to keep inflation lower, and low interest rate tends to drive inflation higher. Increased the interest rate will result in lower customer spending and vice versa.
Economic growth shows how much the overall economy progressing over a period of time. In order for it to have a positive growth, customer spending (Demand) must grow. The consumers have to buy product, then only production will occurs. This in return will generate income for the government and to the people and boost the economy. The cycle continues.
So we can see that, interest rate, inflation, economic growth is interconnected. When the government increase the interest rate, inflation could go lower with customer spending reducing, thus economic growth will also reduced.
Anyway, if the government reduces the interest rate, it will be easier for people to borrow money and depositing money into the bank is not attractive anymore, which in turn will drive the inflation higher. But because supply of money has increased, customer spending (Demand) also increased thus will lead to a higher economic growth.
So, when the BNM decided to leave its key overnight policy rate unchanged at 3.50 pct, I think they were worried about the economy growth as well as the inflation. They believed the 3.5% rate still supportive to the economic growth. As we all know, the government projecting an economic growth target at 5% - 6%. Their hands were tied up. Any movement will result on the inflation or growth to further deteriorate.
Recession happens when the economic growth (GDP) become negative. A country with possible threat of recession, will usually acts by reducing the interest rate to stimulate customer spending and to prevent the stock market from further stumbling. But, they are facing the threat of higher inflation.
One more correlation we can learn here. Reducing the interest rate indirectly may bring the stock market price higher. Because company can borrow money at low cost to expand their business. This in turn will boost the economy growth, and vice versa.
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