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Does increasing the bank interest and lending rates reduce spending to desires levels to curtail inflation? Is the government dependence on printing currency notes to finance government expenditure the real cause of inflation? How does a change in exchange rate push up inflation?
The Most Senior Economist is always the Finance Minister in the country who regulates the country's economy by managing the monetary and financial policies such as:
1. Controlling the prime lending rate
2. Interbank and Repo rates.
3. Reducing the percentage of Cash Reserve Ratios (to control local banks how much to lend and borrow).
4. Fixing the borrowing limits to banks and single group of companies.
5. Suggesting measures to impose or relax custom duties on imports and exports of certain products such as Gold and other precious metals in order to balance the economy.
the central bank regulates inflation through sell of bonds and some treasury intruments to the public and its dealers. this is usually done depending on the state of money circulation in the country .
Two things are very important in it.
- To increase Interest rate that will effect both benefit on deposit and cost of borrowing.
- To reduce or control money circulation.
Interest Rate:
Increase interest rates to reduce consumer spending (hence more saving), because inflation is caused by lots of consumer spending. Higher interest rates mean higher loan and mortgage repayments. This will deter households and firms to borrow, leading to fall in consumption and investment respectively.
Supply of Money:
Reducing the production or supply of money so that the currency doesn't lose more value i.e. inflation causes currencies to lose value or purchasing power.
Exchange Rate:
As a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies. High inflation rates increases the foreign exchange rates and hence weakens the local currency. This in turn reduces the purchasing power.
Central banks increase the bank rates and lending rates thereby reducing the purchasing power.
Central Bank control the rate of inflation by mopping out the money in circulation.
increase the interest rate
the central bank controls inflation through one of the following, open market operation,special deposit,cash ratio,bank rate,funding,credit ceiling etc.
Central banks can reduce the inflation rate by adopting several monetary policy tools. These are used to control the money supply in that economy.