Pick any article talking about the European Central Bank (ECB) or the Federal Reserve (FED) raising interest rates to curb inflation. Some talking points:
- When central banks raise interest rates, it means that they are charging higher interest rates to lend money to commercial banks which in turn charge higher interest rates when lending to consumers. This can affect the economy in several ways. Firstly, it makes borrowing more expensive for businesses and individuals, which can slow down economic growth. It can also make savings accounts more attractive, which can encourage people to save more money instead of spending it.
- Higher interest rates can affect inflation in several ways. First, higher interest rates can make borrowing more expensive, which can cause businesses to slow down their investment and expansion plans. This can lead to less economic growth, which can in turn put downward pressure on prices. Additionally, higher interest rates can make it more attractive for people to save money rather than spend it, which can also reduce the overall level of spending in the economy and put downward pressure on prices.
- Lower investment and expansion can also result in fewer job opportunities and higher unemployment, as companies will stop hiring / start hiring less / may even start letting people go. Additionally, higher interest rates can make it more attractive for people to save money rather than spend it, which can also reduce overall demand in the economy and lead to job losses, as businesses will need less employees to deal with lower demand.
- Higher interest rates can affect exchange rates in several ways. When a central bank raises interest rates, it can make the country’s currency more attractive to investors, who will be drawn to the higher returns that the currency offers. This can cause the currency to appreciate, or increase in value, relative to other currencies.
- An appreciating currency can affect economic growth in several ways. First, an appreciating currency can make a country’s exports more expensive for foreign buyers, which can lead to lower demand for the country’s goods and services. This can slow down economic growth. However, an appreciating currency can make it cheaper for a country’s businesses and consumers to buy foreign goods and services, which can also reduce overall demand in the country and slow down economic growth. Yet, lower import prices means lower input costs for businesses, which might be passed on to consumers in the form of lower prices, lowering inflation.
