By: Ankita Kulkarni
September 16 2020
The central banks in most countries typically nudge down the interest rates to stimulate the economy by increasing the supply of credit available.
The central banks in most countries typically nudge down the interest rates to stimulate the economy by increasing the supply of credit available.Interest rates play a pivotal role in the economy and the process of the economic cycle of expansion and recession. At the onset of a recession, there will be an increase in demand for liquidity. Businesses rely on credit to cover their operations in the face of falling sales; consumers run up credit cards or other credit sources to make up for the loss of income. Simultaneously, however, there is a decrease in supply as banks curtail lending to increase reserves to cover losses on loan defaults and as households draw down savings to cover living expenses when their jobs and other income sources dry up. Hence, the central banks in the respective countries use monetary policy to counteract the standard forces of supply and demand to reduce interest rates. That is why there is a fall in interest rates during recessions.