What is the meaning of raising the interest rate comes within the definition of the economic tools that countries rely on to maintain their financial and economic status, such as the fiscal policy that relies on directing public revenues to achieve the country’s economic goals, and the monetary policy adopted by the Central Bank to control cash and spending rates within the country Also, among these economic tools is the interest rate. From this point of view; The following lines will address the definition of what the interest rate is, what it means to raise the interest rate and when to change the interest rate by raising or lowering it as well.
Definition of interest
Interest, in general, means the financial value and fees paid in exchange for one party's benefit from the funds of a second party, and when the interest is defined by the beneficiary (borrower); It means paying the rental price of the money for a specific period, and when defined by the grantor (the lender), it means the income from lending, and in general, these debts are deducted from the borrowing party before taxes are imposed on his company.
What does an interest rate increase mean?
In light of the knowledge of the meaning of raising the interest rate, the definition of the interest rate in economic terms and applicable in all countries; Means the amount that the donor (lender) and often the bank charges to the borrower as a result of the borrower using part of the bank’s assets for a specified period, and the percentage interest rate is determined annually in what is known as the annual percentage rate, and in short it is known with APR.
The imposition of the interest rate is not limited to money only; Rather, it is imposed on all other forms of borrowing, including (borrowing services and consumer goods, vehicles, buildings, and any other large assets), and the interest rate, in this case, refers to the consideration paid by the borrower as a result of leasing part of the borrower’s assets and benefiting from it for an agreed period. between two sides.
When the lease portion of the lender's assets i.e. the cost of debt carries a low risk; Here the interest rate is lower, while if the lease represents a large part of the assets of the lender; Here the risk is high and the interest rate is raised, and in many loans, the interest rate is determined based on the loan amount.
Reasons for changing the interest rate
Sometimes; The state is forced to raise or lower the interest rate on lending in light of the difference between inflation and depression. Among the most important reasons that economists have pointed out , that result in changing the interest rate, are the following:
The occurrence of inflation results in a decrease in the value and purchasing power of the currency within the country, and from here it is harmful to raise the interest rate to reduce the value and rate of lending, and then; You can control the state of economic inflation before it gets out of the government's control, and when raising the interest rate, this results in several negatives, such as:
Investors here save instead of setting up projects to get the high-interest rate.
The volume of lending within the country decreases significantly; Especially since the high-interest rate is a heavy burden on various investment projects, and thus their owners are reluctant to borrow.
When the inflation rate is too low; The state here seeks to enhance the volume of investments by lowering the interest rate to control the low levels of investment and avoid the occurrence of depression or economic stagnation. Among the effects of lowering the interest rate are also the following:
Investors' appetite for borrowing, then; Establishing projects and achieving the desired economic boom within the country.
The amount of savings by investors also decreases because the low-interest rate will not bring them the desired profit if he saves.
After the article, we will have known what is the meaning of raising the interest rate and when countries are forced to raise the value of the interest rate on lending, and when they are also forced to reduce the interest rate. Continuously and vice versa within countries with high purchasing power currencies.
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