What is the economic justification for raising interest rates?

[dilberto]

Central banks of many leading economies currently experiencing very low interest rates seem impatient to return interest rates to nearer their historically normal level despite growth in those economies being subdued and inflation rates being low.

What problem would higher interest rates address given the prevailing economic conditions?

Personally I've yet to hear a logical argument in favour of raising interest rates,
what is the economic justification for raising interest rates, is there one?

 

[bi0boy]

Interest rates rises take a long time to have an effect. So in considering a rise they'd be looking not at the low inflation rate now, but what it might be in 1-2 years time.

 

[newbie]

I can't answer the question in the op, but I'd reflect that when the crash happened in 2007/8 we were told that it was caused by over-borrowing, by people being given access to credit that wouldn't have been available in more sensible times.

Since then interest rates have been tiny, rewarding those who borrow as much as possible and punishing those who save. Saving in ISAs, building society accounts and the like is not worthwhile, so the 70% or so of the population who have money to keep for the short- or long-term are encouraged to speculate- shares, gold, peer to peer. That's not saving, it's gambling, and if there's another crash they have none of the security available to ordinary savers.

Strikes me as madness, but I'm not a hotshot economist.

 

[Yuwipi Woman]

Central banks of many leading economies currently experiencing very low interest rates seem impatient to return interest rates to nearer their historically normal level despite growth in those economies being subdued and inflation rates being low.

What problem would higher interest rates address given the prevailing economic conditions?

Personally I've yet to hear a logical argument in favour of raising interest rates,
what is the economic justification for raising interest rates, is there one?

There's several reasons:

* Interest rates this low don't allow for further dips in the economy. If the economy crashes again, there's very little left in the arsenal to address it.

* Interest rates this low favor the very rich and penalize poor people who manage to save a little bit. Anyone with a pension or a little savings is getting screwed. Rich people invest in markets and businesses they don't really put their money in a bank to earn interest. So its a way of transferring wealth upward.

* Such free amounts of money roaming around encourages riskier investments. There's no where reliable to put your money, so more and more people are putting it into riskier and riskier investments. This causes a boom and bust cycle to develop. These boom and bust cycles also favor the rich who can take avantage of the busts to pick up assets on the cheap.

I'm sure there's people who know more than I do about economics who could give you a better answer.

 

[kabbes]

Part of it is what amounts to an unsubstantiated belief that the "natural" rate is something in the region of 5-10%. So like all good religious folk, things working against their creed concern them without there really needing to be a logical "why".

 

[butchersapron]

Central banks of many leading economies currently experiencing very low interest rates seem impatient to return interest rates to nearer their historically normal level despite growth in those economies being subdued and inflation rates being low.

What problem would higher interest rates address given the prevailing economic conditions?

Personally I've yet to hear a logical argument in favour of raising interest rates,
what is the economic justification for raising interest rates, is there one?

jews.

I believe this in line with what you require.

 

[dilberto]

The bias at the heart of conventional economic thinking is that its logic and assumptions are inextricably linked to the process of cumulative change inherent in economic development and so when that process of change reaches its limits, as all change does, and is eventually reversed then those conventional assumptions are confounded and contradicted by those new economic conditions.

This may be why conventional economic thinking appears to be perplexed by the economic conditions being experienced in the wake of the debt crisis because it signals that those economies have reached the limits of economic growth.

 

[dilberto]

Interest rates are an indicator of what a borrower is prepared to pay for credit and reflects his ability to repay that debt, a national economy's ability to repay credit is determined by its future rate of economic growth. So interest rates could be seen as a market indicator of the potential rate of economic growth for an economy.

When an economy matures to a point at which there is insufficient potential for growth from that economy to service its existing debt then that economy must reduce its rate of borrowing and standard of living in order to redress the shortfall in the returns from growth in order to service its debt, this is called austerity, in such an economy the level of output is likely to exceed the level of demand and that economy is then predisposed to deflation.

The low rate of economic growth in such an economy means that there are lower returns on credit, so interest rates must also be low in order that the extension of credit remain profitable.

The above is my explanation for the current economic conditions being experienced by western economies in the wake of the debt crisis and why interest rates are low and are likely to remain so for the foreseeable future.

 

[butchersapron]

Gibe me a d!

 

[goldenecitrone]

Gibe me a d!

I'd lay off the mead if I were you.