Monetary Policy

Written by Anuar Burkitbayev and Alexey Dudarev.

As you know, banks have two basic purposes - lending money and storing money. When lending money, people are then required to return more money than they borrowed. Imagine your friend gave you his homework for you to copy, and in return he wants you to give him two homeworks on another subject. Does this sound fair? Not really. However, this extra charge is acting as another government’s lever to control the economy, and it’s called the interest rate. The interest rate is the percentage of money being borrowed which is added to the amount to be returned. Governments influence interest rates in order to yield certain results.

Interest rates are controlled by the central bank. If they are high, people are less likely to borrow, but more likely to save as it will add more money in their account. And because of this there will be less money circulating in the economy. This may slow down the economical growth of a country and lead to higher unemployment. However, if interest rates are lowered, people are going to borrow more and save less, causing more economical activity. This raises demanded and therefore prices, and because of this faster inflation. So as you can see, extremely high and extremely low interest rates are bad for the economy, so the central bank has to balance somewhere in between for the economy to grow at a stable rate.