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The interest rate generally influences financial and investment decisions and the consumption habits of individuals, including investors, to allow them to spend money, invest in different sectors or deposit them commercial banks to take advantage of the deposit rate.
Since the role of central banks is usually to determine the general framework or direction of the interest rate on government bonds and deposits, commercial banks comply with these guidelines and commit to deal with their loan customers, loans and deposits.
Lower interest rate
When interest rates are low, individuals tend to spend their money buying goods such as cars and real estate, or investing in income generating projects rather than depositing them in banks. and get a low useless interest rate.
Investors are also encouraged to borrow from banks to expand their business, because of their low cost, which translates into higher incomes, higher employment rates, and higher expenses, thus boosting the economy. and increasing investment opportunities.
Increase the interest rate
Increasing interest rates and deposits, individuals, including investors, therefore place their money in banks to take advantage of the high interest rates of deposits, certificates of deposit and government bonds, which constitute a guaranteed and secure profit, in addition to the risk of investment in projects. Borrowing costs and investment. This leads investors to be reluctant to borrow from banks to expand their projects or to open new ones, given rising interest rates, which is a financial burden that exceeds investment income.
Higher interest rates eventually lead to lower consumption, with people avoiding home loans, cars, etc. due to rising borrowing costs from banks.
It generally contributes to the rise and strengthening of the value of the national currency, as demand for it increases from individuals, including domestic and international investors, who are eager to buy government bonds. or deposit in national currency to take advantage of high interest rates.
Why are central banks raising or lowering interest rates?
The central bank of a country intervenes by reducing or increasing interest rates in a precise and limited way in order to promote growth, reduce inflation and unemployment and support the national currency, giving priority to the economic problems facing the country.
Promote growth
In times of recession, individuals do not have enough money to buy goods, which means that demand is lower than supply, resulting in a recession or economic slowdown, which drives homeowners companies and factories to lay off workers and stop investment, thereby increasing unemployment.
Governments oppose this through an "expansionary monetary policy", in which they are committed to stimulating economic growth by reducing interest rates, by encouraging individuals to , including investors, to withdraw their funds deposited with banks and invest them in a profitable economic activity or to use them to buy goods. Services, the demand is increasing.
Control inflation or high prices
In case of inflation where individuals suffer from high prices of goods and services, countries tend to intervene by adopting a "restrictive monetary policy" aimed at reducing inflation by reducing the supply of liquidity in the market, consumers or investors, and thereby reduce their competition for goods and services, resulting in lower prices at normal levels.
This is achieved by raising the interest rate that encourages individuals to save and deposit their money with banks and reducing their appetite for consumption. Due to the difficulty of borrowing due to rising interest rates, investors are reluctant to embark on new projects, preferring to invest in bank certificates and government bonds, less money to buy goods and services, less competition and lower prices.
Support the national currency
Countries use higher interest rates to attract foreign investors to government bonds and deposits in local or national currency, and use these funds to support the national economy. Individuals tend to make deposits, taking advantage of the high interest rate, rather than buying US dollars or foreign currencies, which increases demand for local currency and enhances its value.
For example, the Central Bank of Jordan raised interest rates after a similar move by the US Federal Reserve in recent years. The CBJ seeks to increase the attractiveness of the dinar and encourage individuals to own it by placing it with banks at a higher rate than the US dollar or any other foreign currency, while maintaining the price, attractiveness, the possession and circulation of the local currency.
The result is that the interest rate is a tool of several monetary instruments owned by the state to control the amount of money held by individuals, including investors, who direct their preferences regarding consumption or investment and their decisions to invest, consume or deposit.
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