Interest Rate Raise vs Economic Recovery

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Interest Rate Raise vs Economic Recovery
Adam Sheikh
The Reserve Bank of Australia raised the cash rate by 25 bases point to 3.25%. Reason: the global economy is resuming growth. How far can a rise in interest rate contribute to the envisaged world economic growth?

Conequences of an Interest Rate Raise / Cut on Economic Growth
venkataramanan, Member
An increase in interest leads to mobilization of savings i.e. capital formation.
While if this money would have been invested, an increase in production is achieved > more goods > more employment > economic growth.

Effects of Interest Rate Raise on Economy
Onyango Lucius, Member
The problem with raising the interest rate is that the economy will hold on to their money instead of investing it. Investors may even wait for another raise in the interest rate which might take a long period. This will affect the economic growth negatively.

Effect of Interest Rate Raise on Economic Recovery
Jaap de Jonge, Editor
I agree a raise of the interest rate normally has a NEGATIVE effect on the economy resuming growth. Because it makes it relatively more interesting for those who have money to put it on some savings account (bank) instead of investing it (in shares/stock, which then allows companies to invest and grow, which then stimulates the economy). And indeed @Onyango Lucius is right that even certain investors may anticipate further future interest rates so they would keep their money at hand in case that happens.

Relation Between Interest Rate and Economic Growth
sanjeeb mohanty, Member
When there is an interest rate increase, there will also be a consequential rise in the prime lending rate for banks (to companies) which may adversely affect the credit off take and so capital formation in businesses will be affected negatively.
This also supports the notion that economy growth will diminish.


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