How does raising interest rates control inflation?
How does raising interest rates control inflation?
When central banks raise interest rates, the impact is felt far and wide. Mortgages become more expensive, house prices might fall and unemployment can rise. So why do central banks do it? This film tells you why.
00:00 - Why should you care about rising interest rates?
00:45 - What are interest rates?
01:36 - What do central banks do?
02:14 - Why do central banks raise interest rates?
03:12 - How do raised interest rates affect consumers?
04:30 - How do raised interest rates affect businesses?
05:20 - What are the risks of raising interest rates?
06:05 - How do interest rates affect inflation?
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Listen to our podcast on whether interest rates will trigger a recession in America: https://econ.st/3M0x2ef
Why interest rates may rise sharply to fight inflation: https://econ.st/3NghS60
Which housing markets are most at risk? https://econ.st/3z8FeXi
Is Turkish President Erdogan’s monetary policy as mad as it seems? https://econ.st/3t797Du
Why are investors worried about recession in America? https://econ.st/3z51nFX
Do the poor face higher inflation? https://econ.st/3NGON3G
Has the Federal Reserve made a mistake on inflation? https://econ.st/3t5YTDl
Content
0.64 -> when central banks raise interest rates
3.04 -> it's big news bank is judging that the
6.16 -> only way they can try to pull down
8.24 -> inflation is to carry on raising
10.559 -> interest rates we're going to see rising
12.16 -> rates rising interest rates that will
14.4 -> make the cost to borrowing go up it can
17.039 -> send ripples across the whole economy
20.16 -> it can sink consumer confidence result
22.8 -> in fewer jobs and lower wages and cause
26 -> stock prices to fall if they go too far
29.359 -> too fast it can tip economies into
31.599 -> recession
32.8 -> so
33.6 -> why do central banks raise interest
36.079 -> rates
37.16 -> [Music]
46.16 -> let's start with the basics
48.32 -> if you borrow money you'll have to pay
50.32 -> back a little extra to make it
51.92 -> worthwhile for the lender well i think
53.84 -> we can make you this long you have a
55.68 -> good reputation we know you're reliable
57.92 -> i'm glad you think so
59.6 -> this is the interest rate
62.16 -> so if you are taking out a loan you want
64.799 -> the interest rate to be as low as
66.159 -> possible so you don't have to pay that
68.24 -> much back
69.52 -> on the flip side if you want to save
71.6 -> money then a high interest rate means
73.6 -> you can earn more on your savings
76 -> see it as a reward for leaving money in
78.08 -> your account but the size of your reward
80.799 -> depends on the circumstances
83.04 -> there's no single interest rate in the
85.439 -> economy you've got thousands of banks
87.36 -> setting their own commercial rates
89.92 -> that's all influenced though by the
92.72 -> interest rate that the central bank sets
97.04 -> a central bank is like a bank for banks
100.56 -> just like you and your savings account
102.799 -> banks also earn interest when they leave
105.119 -> money with a central bank
107.36 -> commercial banks have these things
109.04 -> called reserves so that's a bit like
111.28 -> their cash on hand
113.119 -> commercial banks lend those excess
115.52 -> reserves to each other at an interest
117.52 -> rate and they also can deposit their
119.68 -> excess reserves at the central bank
122.399 -> and when they do that they can earn an
124 -> interest rate
125.28 -> ordinary people can't access the
127.92 -> interest rate on the excess reserves but
130 -> it still affects them
132.08 -> and that's the idea
134.64 -> when central banks raise interest rates
137.04 -> they're trying to control inflation how
139.599 -> fast prices rise for everyone they were
142.239 -> 129 now they won 39 and last in the
145.28 -> space of four weeks central banks like
147.68 -> the fed or the bank of england or the
150 -> european central bank are all trying to
152.08 -> hit an inflation target of two percent
155.519 -> interest rates are a really powerful
157.599 -> tool that they have to do that
160.16 -> if inflation is seen as too high
163.68 -> that's when banks raise interest rates
166.56 -> the change spreads through the financial
168.56 -> system and slows down the rate of
170.8 -> inflation
172.239 -> here's how
173.44 -> a rise in interest rates from a central
175.44 -> bank means that a commercial bank will
177.599 -> earn more on their reserves
180.159 -> they might make more from keeping their
181.76 -> money in a central bank then lending it
184.319 -> out
185.76 -> so if they do lend it out they'll raise
188.08 -> their interest rates to make it worth
189.84 -> their while
192.319 -> how that affects consumers depends on
194.4 -> the economy
195.68 -> take mortgages
197.28 -> in places like finland or australia
200.48 -> lots of people have mortgages with
202.64 -> variable interest rates
204.64 -> if you've got a variable rate mortgage
207.12 -> where the interest rate that you pay is
209.599 -> linked to the central bank's interest
211.519 -> rate then higher interest rates mean
213.84 -> that essentially immediately the higher
216.72 -> rate will translate into less cash to
218.799 -> spend on other things
220.56 -> less spare cash means households will
222.959 -> spend less
224.56 -> and less spending means businesses will
226.799 -> be warier of raising prices this should
230 -> lower inflation
231.519 -> in other countries like america or
233.76 -> canada a bigger share of mortgages are
236.319 -> set at fixed rates
238.72 -> people with fixed rates are protected
240.56 -> against the direct effects of an
242.4 -> interest rate rise
244.4 -> but will still feel an indirect impact
247.76 -> higher interest rates mean that
249.84 -> mortgages will become more expensive
253.36 -> if that is affecting all new buyers then
257.28 -> house prices will begin to fall and that
259.84 -> will make everyone who owns a home feel
262.24 -> poorer and therefore they might spend
264.8 -> less
265.919 -> lower spending will translate into lower
268.16 -> inflation
269.759 -> and it's not just consumers who will
272 -> tighten the purse strings
273.84 -> when interest rates rise then businesses
276.479 -> will find it more expensive to borrow
278.96 -> and invest
280.56 -> that generally means less economic
282.479 -> activity it might mean fewer jobs are
286.72 -> created
288.639 -> fewer jobs and lower wages could mean
291.28 -> less money for households and consumer
294 -> confidence might suffer which also means
297.28 -> less spending
298.8 -> people are grappling with a decline in
300.639 -> real wages meaning their money buys less
303.759 -> when interest rates rise that will tend
305.6 -> to slow down spending investment and
308.4 -> generally depress economic activity
311.84 -> overall that will make businesses more
314.639 -> reluctant to raise their prices
317.039 -> and that will tend to pull back
318.479 -> inflation
319.6 -> it sounds straightforward right
322 -> but the trick is judging how far to go
325.919 -> in 1981 the federal reserve america's
329.12 -> central bank allowed interest rates to
331.6 -> rise to a whopping 19
334.72 -> the move curbed inflation but it led to
337.6 -> widespread economic pain
340.479 -> i regret to say
341.919 -> that we're in the worst economic mess
344 -> since the great depression
345.919 -> it is very difficult to get inflation
349.039 -> under control
350.32 -> without severely denting economic
352.479 -> activity in america it's been over 70
356.479 -> years since they've managed to get
359.52 -> inflation down from over five percent
361.759 -> without causing a recession
364.639 -> a little inflation is okay it keeps the
367.44 -> economy moving at a sensible speed but
370.16 -> inflation staying high for too long is a
373.199 -> problem
374.479 -> higher prices means employees will need
376.8 -> higher wages pushing up costs for
379.28 -> businesses that could drive up prices
381.68 -> further potentially leading to an upward
384.319 -> spiral of wages and prices
386.88 -> retail inflation india has surged to 7.8
389.199 -> percent the combination of step 8
391.199 -> economic activity and high inflation
393.36 -> poses serious challenges for indian
395.199 -> economy going forward central bankers
397.44 -> are really concerned about setting
399.12 -> expectations of inflation the idea is
402.16 -> that if it can show that it is credible
404.639 -> that it will always act to get inflation
407.199 -> back down to two percent then maybe it
410.479 -> won't have to you know raise interest
412.96 -> rates and then lower them in this kind
414.4 -> of seesaw fashion
416.8 -> raising interest rates can slow an
418.639 -> economy right down the trouble is the
421.84 -> brake pedal has a delay
424.16 -> it can take as long as two years to see
426.479 -> the full results from interest rate
428.479 -> changes
429.52 -> central banks know this
431.599 -> so when they set interest rates they're
433.68 -> actually trying to read the road ahead
436.4 -> but predicting the future isn't easy
440.639 -> the problem is it's difficult for the
442.479 -> central bank to work out whether the
444.72 -> inflation will fall back on its own and
447.28 -> even when central banks do get it right
450.16 -> they might still cause a crash
452.88 -> it may be a blunt instrument
455.44 -> but raising interest rates is still
458 -> central bank's main tool for taming
460.24 -> inflation
461.36 -> central bankers would say that yes
463.44 -> raising interest rates can be painful
465.599 -> slowing down the economy is not fun
468.319 -> but it's worth it it's worth it to get
471.12 -> low and steady inflation so that in the
473.84 -> long run you don't have to think about
475.28 -> it
478.16 -> thank you for watching to read more of
480.4 -> our coverage on interest rates click the
482.4 -> link and don't forget to subscribe
493.68 -> you
Source: https://www.youtube.com/watch?v=R8VBRCs2jTU