The interest rate is usually increased or in some cases decreased by Central Banks, for example in Canada, the Central Bank usually keeps the interest rate under 2.0 which means Canada has predictable growth in prices, and a controlled unemployment rate which helps companies to prepare the budgeting and sales forecasting in a more consistent way, however, in the last two years, the economy around the world was witnessed the faster growth in the prices which has been lead to limiting the consumer's purchasing powers, higher prices, and increased rate of unemployment. Usually, in these kinds of circumstances, Central banks around the globe will increase the interest rate to control the price by "limiting spending and reducing borrowing" (Kozicki. 2019).
Inflation means a continuous increase in general prices in the economy and poses a serious threat to macroeconomic stability worldwide. (Herawati. 2022). Globalization caused more productivity, better circulation of wealth, and increased innovation around the globe, but also chained most of the economies together, which means inflation and supply chain problems, more or less, can affect many countries at the same time and therefore Central banks try to minimize the negative effect of inflation by increasing the interest rate, and the curve of supply and demand to prevent sudden changes in the market and severe imbalance between the employee's wages and CPI.
Although the main reason that Central banks increase the interest rate is, to control the market and consumer's shopping powers, the effects are not always positive, because these types of changes, usually cause the fall of the prices on stock markets and overall on the people's assets and capitals, and more pressures on banks to approve the loans or cause the unrealistic increase in the loan's interest. The circulation of money between banks and people is necessary requirement for a healthy economy. Money by itself doesn't have any value, until it is placed in the market as an asset or capital to create wealth, in other words, money can bring wealth when it is circulating in the market, and increase the interest rate limiting the circulation of the money in the market.
Based on the current global market, the Ukraine war, and the several times' hikes in interest rates, many world leaders wondering, if we are at a merger of recession or not. Although Bloomberg's most recent article written by Barnet gave a more positive prediction. Barnet, in his article, mentioned that the investing leaders' predicted a better and more positive outlook in the stock market for 2023. In his article, he mentioned that the stock market can see a more positive turnaround in the upcoming months, which can prevent recession and more interest hikes. many business sectors that had rough years in selling their products and their stock are positive that they can have a better turnaround in the coming year.
Overall, the interest rate has a direct link with inflation, trading, CPI, and overall businesses around the world. Inflation is an occurrence that limits the customer's shopping powers which leads to the downfall of the companies' production levels and unemployment rate, although the increase of the rate can smooth the process but can not fully fight inflation.
Mandana. Gh. Moba
References:
Barnet, J, (Dec 2022). World’s Top Money Managers See Global Stocks Recovering in 2023. Retrieved from: www.bnnbloomberg.ca/world-s-top-money-managers-see-global-stocks-recovering-in-2023-1.1857501
Herawati, M. , Sumaryoto . Sidik, M. (2022). Impact of Imports and Interest Rates on Inflation: A Case
Study in ASEAN Countries 2006-2019. retrieved from: web.p.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=7&sid=b2193ad1-40fb-4aba-a297-e945396fa389%40redis
Kozicki, Sh. Vardi, J. Savoie-Chabot, L. (2019). Price Check: Inflation in Canada. Retrieved from: www.bankofcanada.ca/2019/02/price-check-inflation-in-canada/#:~:text=Higher%20interest%20rates%20encourage%20saving,if%20it%20is%20too%20low.
Popli, N. (2022)The Fed Just Raised Interest Rates By .75 Points. Here’s How That Helps Fight Inflation. Retrieved from: time.com/6227633/inflation-federal-reserve-interest-rates/
Image retrieved from: Inflation-1200.jpg (1200×800) (bp.blogspot.com
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