2022 Exam Application Context - High and Low Interest Rates

In this video we look at countries (in 2022) where monetary policy interest rates are really high and also those where interest rates are negative.

High interest rates:

In Argentina, policy interest rates were 47 per cent in April 2022. In Turkey, interest rates were 14%. And in Brazil, they were 12%.

Low interest rates:

In Japan, monetary policy interest rates are negative (-0.1%) and so too in Switzerland (-0.75). In the Euro Zone, interest rates are 0.0%

Monetary policy interest rates are set by Central Banks. Some Central Banks are wholly independent of government, but in other countries, government can seek to influence and direct where they want interest rates to move. A good example of this is Erdogan in Turkey wanting to cut interest rates despite very high inflation.

Typically, very high interest rates are associated with nations where there is a persistently high rate of inflation. An example is Argentina where 55% (it is over 60% in Turkey). Central banks use tighter (deflationary) monetary policy in a bid to control demand-pull and cost-push inflationary pressures and also to help stabilise the external value of their exchange rate.

Japan adopted negative interest rates in 2016 in an effort to combat decades of deflation by encouraging borrowing and spending. Switzerland has also moved to negative rates partly to prevent deflation caused by having a very strong (appreciating) exchange rate.

Evaluation Perspectives:

Do periods of very high interest rateshelp to control inflation? What othermacroeconomic effects might they have in the medium term? For example, what are the roles that fiscal and supply-side policies can make?

Do negative interest rates necessarily work to stimulate consumer demand and investment? How else might deflation be avoided?