VIII - The two rates: (2) Interest

Abstract

This chapter discusses the two rates of interest. The rate of interest has a significant role in the modern economy. Its role in the economy is now different from that which it had 25 years ago as the economy in which it operates is different. A rise in the rate of interest will have a depressing effect on those parts of consumer spending that, because they involve large outlays, are dependent on credit. But other consumer spending will remain high and might even be increased, inter alia, by the transfer of expenditure from the interest-dependent objects. Through its effect on production and employment, a rise in the rate of interest will therefore tend to intensify inflation and a fall in the rate will tend to reduce it. More directly, the rate of interest will have an effect on production costs, especially on those industries that are heavily dependent on borrowed funds, and this impact on costs will again intensify inflation if the movement in the interest rate is upward and will reduce inflation if the rate moves downward.