Question

1. Explain the reasons why interest rates can be different in different countries.

Answer 1

Interest rate vary among various countries due to the following reasons-

A. Difference in inflation rates among various countries is one of the reasons because the inflation rates in different countries are different so Central banks act as a monetary authority for those issues and it will always be trying to monitor the money flow and the inflation in the overall economy so it will be trying to to increase or decrease the interest rate policies in order to control the inflation in the economy.

Generally the central bank will increase the interest rate when there would be higher inflation to slow down the money flow into the economy and when the inflation is lower, the central bank will be trying to lower the interest rate so that there should be a stimulation in the demand in the economy.

B. It can also be attributed to issue of currency because currency markets are also exposed to fluctuation in interest rate as there would always be a depreciation or appreciation of domestic currency in respect of various foreign currency and such currencies are always regulated by the central banks of the economy so they will be trying to influence the currency rate by increasing or decreasing the interest rate.

C. It is also done in order to stabilize different economy because there would be risk associated with lending and borrowing which are to be minimised by interest rate fluctuations.

D. Changes in interest rate across globe can also be attributed to different economic growth and employment generation ability of the economy.

E. It is also related to time frame and policy formation as well because different countries will be trying to formulate different kind of policy in order to maintain the stability into the economy and they will also be trying to have the the cyclical fixation of interest rates.