Interest Rates in The Market Assignment
Abstract
The report analyzes the role of interest rates in investment decisions of the different economic agents. It has been proven that interest rate is one of the main indicators for investors in a national economy, since it reflects the price for money. Also, investors are able to define the expected rate of return and evaluate efficiency of investments, according to the existing level of interest rate. Traditionally, low interest rates must boost investments and economic growth, respectively, and vice versa.
Interest Rates
Investments are considered to be one of the main drivers of economic growth of a country alongside with consumer spending, savings and government purchases. There are a lot of factors that may influence investment decisions. An interest rate is one of them. Interest rate can be considered as a price for money in a national economy. Lower price for money means that economic agents are going to borrow and invest money more actively. Also, if commercial banks are able to borrow money in a central bank for lower interest rate, they will be able to credit national economy actively. In the end, all these factors are going to contribute to growing investments in a national economy.
Generally, the main reason for the growing investments because of lower interest rates is higher availability of credits for businesses. The indicative interest rate for a whole national economy is an interest rate, established by the central bank of a country. This interest rate is imposed on commercial credits lent to commercial banks. As a result, this is the lowest possible price of credits for businesses.
Lower interest rates mean higher levels of credits of businesses and investments into a real economy. That is why governments of a lot of countries have decided to lower interest rates after the global financial crisis of 2008 to boost economic development. For example, the current interest rates, established by central banks, are 0.5% in Canada, 0.5% in the United States of America and even -0.1% in Japan (Worldwide Central Bank Rates).
Alas, the practice has shown that the growth of investments has been quite moderate in the world, despite the lowest possible interest rates. Thus, low price for money has not been enough motivator for faster pace of economic growth. There are two groups of reasons for such situation. On the one hand, fundamental reasons for economic decline have not been eliminated. For example, global financial system has not been reformed. On the other hand, lower interest rates may affect the level of savings in a national economy as the main source for internal borrowings and investments.
The gross national savings are the source for investments. Low interest rates discourage savings, and there are not enough financial resources for potential investments. Citizens are not interested in savings because of lack of attractive and profitable financial instruments. The existing interest rates may not even overcome the inflation rate. That is why it sounds more reasonable to consume money, since money today is more expansive that …
