Effect of Interest Rates on Economic Growth in Bangladesh

Abstract

The interest rate is the amount of interest paid by a borrower to a lender and is set by the central bank of a certain country. Interest rate is regarded as a key variable affecting savings and investment. The interest rate which is set by the central bank is called the base rate. The base rate affects the aggregate output. Thus, the study examined the effect of interest rates on economic growth in Bangladesh. The study did a literature review to have an overview of what others found regarding the effect of interest rates on economic growth. Based on the findings of the study, it was revealed that interest rates affect economic growth. The reduction of interest rates increases economic growth. If the interest rate is good, it keeps output growth high. The study discovered that low rates of interest help the economy grow since people can get more money to make purchases and invests in businesses, thus spurring economic growth. Access to loans from financial institutions depends on interest rates. A country cannot grow if the cost of borrowing is very high and this is significantly influenced by the interest rates. The study also noted that when the base rate increase, the interest rates from the financial institution also increases. Hence, interest rates affect the economic growth in Bangladesh. High rates tend to reduce the pace of economic development. The research concluded that interest rates should be made at a reasonable rate to spur economic growth. The study recommended that the central bank in Bangladesh, Bangladesh Bank, should develop policies and frameworks that will ensure the interest rates are key as low as possible. The government needs to embrace policies that will aid Bangladesh control interest rates and raise money circulation in the economy. Keywords: Interest Rates, Economic Growth, Bangladesh