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Low interest rates

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posted on Jan, 7 2010 @ 09:14 AM
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Hi, sorry for the mistakes in my text, I'm french and trying to improve my english everyday.

Ok, my question may look stupid to someone who have economic knowledge but there is something I dont understand with interests rates.

When the economy crash in 2008-2009, Central bank around the world lower the interests rates and it help the economy, small business and give a boost to the economy. Well these lower interest were almost a savior to the economy. The banks are supposed to raise the interest in the coming months.

My question is WHY the central bank dont keep the interest rates very low forever if it's so good for everyone?

I know that will cause another problem but I would like ton know what would happen with very low interest rate for a very long time or forever.

Thanks in advance for the answer.




posted on Jan, 7 2010 @ 10:31 AM
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Inflation is your answer. In a healthy economy (not like we have here) there will be significant demand for that money to start new businesses, expand etc.

Just ay all the banks have 1,000,000USD (unrealistic, but for simplicity's sake), and it can lend it at 5%. At 5% people want to borrow say 1.2 million USD. This demand is going to have the lenders short on supply, so they will increase interest rates to whatever the market will bear (say 6%). When the interest rates are at 6% the poeple who wanted to borrow the 200,000 will back out, thinking the money is too expensive for them.

If they didnt, all the money out there would drive up prices for things. IF everyone was chasing the same resources (say....copper) with those increased amounts of dollars (For instance say the banks got money from central bank) and could lend out 1.2 million, they would chase the copper and the price of copper would go up.

Hope that helps,



posted on Jan, 7 2010 @ 01:07 PM
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Thank you, I understand now.



posted on Jan, 7 2010 @ 02:56 PM
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Also investors would normally shun countries with prolonged lower interest rates because they won't earn as much with the money they lend or invest.

Last quarter the Aussie dollar rose as investors chased it because the Central Bank raised interest rates.



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