Inflation and interest rates are two of the most powerful forces shaping any economy. They influence everything from the price of groceries to the cost of borrowing. But how exactly does inflation control interest rates🤔 Let’s break it down.
đź’¸High Inflation=High Interest Rates~
Central bank like RBI use interest rate as a primary tool to control inflation.
When inflation rises interest rates also increases this makes borrowing expensive (making loans expensive) due to which there is fall in money supply. A fall in money supply will lead people having lesser money to spend on goods and services (reduce spending) which in turn lead to fall in demand for good and services.
High Inflation -> Less Money Supply -> Results in Declining Demand of Good & Services + Constant Supply of Goods & Services = Fall in The Prices.
đź’¸Low Inflation=Low Interest Rates
When inflation fall interest rate also decreases this will make borrowing cheaper (making loans cheaper). When borrowing increases money supply also increases, with increase in money supply people will now have more money to spend on buying good and services.
More Money = More Spending on Goods & Services = Increase in Demands of Goods & Services -> Result in Increase in Prices(Inflation)
Inflation directly influences interest rates because central bank of India use interest rates as their main tool to keep inflation within target levelsđź’ˇ