What is the relationship between Inflation and Interest Rates? (1 Viewer)

[ameh]

Can someone clarify and explain this to me in plain, simple english?


Thanks!

 

[nick1048]

interest rates stop inflation from increasing too rapidly. Because people can't get their hands on loadable funds, or dont really want to now with the higher cost of the debt, the artificial demand created by the low interest rates is removed. It is a drastic measure, however out of control inflation is a huge economic problem as it erodes the country's specific currency. It is only wen inflation was hit dangerously high levels, that Interest rates will b increased.

hope it helps

Edit: Shit sorry, yes you are quite right, that's what you get trying to post an answer @ midnight, my appologies.

 

[ameh]

when inflation soars thru the roof, doesn't that mean interest rates are increased? Because the RBA wants to lower household spending so as to decrease the inflation (sorry bad explaining here)

 

[Eagles]

when inflation soars thru the roof, doesn't that mean interest rates are increased? Because the RBA wants to lower household spending so as to decrease the inflation (sorry bad explaining here)

Yes.

Inflation up because people got money to push prices up.

Rise in interest rates = cost more to borrow money = disinsentive to invest = less people invest to push price up = slows down rate of inflation.

Its all cause and effect.

 

[ameh]

ahh ok thanks guys =)

 

[pungpui]

just 1 thing...you guys have said the RBA increases rates when inflation soars, or increases dramatically, or something as if it sky rockets....TOTALLY not the case...

the RBA will adjust rates to try and keep inflation within the 'inflationary target band' (or some fancy name like that, cant remember) of about 2-3%...which isnt dramatically high or anything...this range is what RBA sees as eocnomically sustainable and viable...

someone said 'increasing too rapidly'...hello? inflation is like 2.6%...its not increasing rapidly at all and rates increased.

u need 2 get into the habit now of not using highly emotive words like dramatically, soaring through the roof...etc etc etc, remember economics are VERY boring people (trust me...the lecturers n tut ppl @ uts fr eco r the WORST out of all of em)...use words like significantly, etc. I got my fare share of complaining from teachers last yr for my use of those words

 

[gibbo67]

In addition to a high rate of inflation, the RBA will also raise interest rates if the average wages growth exceed 4.5% as it could pose future cost-push inflation, remembering that approximately 60% of business expednditure is on labour.

Often in the media, they generally leave out the terminology of inflation e.g. the constraints of the labour market will cause higher interest rates or my favourite example, electing the ALP will cause higher interest rates (for reasons that were never specified in the Liberal ad campaign), since interest rates are used with a greater deal of emotional impact than 'inflation' and are more easily relatable to the general public than to anyone doing economics. Just be aware that it is inflation that they are referring to.