How do changes in interest rates affect inflation and consumer behavior?
Answer (1)
Interest rates play a powerful role in controlling inflation and shaping how people behave in the economy. When the central bank (like the Bangko Sentral ng Pilipinas or BSP) changes interest rates, it sends a signal that affects spending, saving, and borrowing.BSP's Interest Rates Increases If the BSP increases interest rates, this means borrowing money becomes more expensive. For example, if someone wants to get a car loan, they will have to pay higher monthly interest. As a result, people may choose to delay big purchases. Businesses also borrow less for expansion because higher interest increases their operating costs. This slows down consumer spending and investment, which lowers demand in the economy and helps reduce inflation.BSP's Interest Rates DecreasesOn the other hand, when the BSP lowers interest rates, loans become cheaper. People are more likely to buy homes, appliances, or cars. Businesses invest more because loans are more affordable. This increases consumer spending and boosts economic activity, which can lead to higher inflation if demand grows too fast.In the Philippines, we saw this during the pandemic.How Interest Rates Drive The EconomyTo support the economy, the BSP cut interest rates to record lows, making loans cheaper so that people and businesses would keep spending. This helped reduce the economic shock, but it also increased inflation risk later.For consumers, high interest rates encourage saving—because bank deposits earn more interest. Low rates, meanwhile, discourage saving and push people to spend more or invest in assets like real estate.So in simple terms, interest rates act like a brake or a gas pedal for the economy. Raising rates slows things down and controls inflation. Lowering rates speeds things up but risks overheating the economy.Understanding this connection helps students see how government decisions directly affect their family’s expenses, savings, and the prices they see in stores.
