How does inflation affect savers and lenders, and why does it matter to the economy?
Answer (1)
Inflation negatively affects savers and lenders because it reduces the real value of the money they receive in the future. When inflation is higher than expected, the interest earned from savings or loans may not be enough to maintain purchasing power. This matters because it discourages saving and responsible lending, which are important for economic stability.For example, imagine a student saving ₱5,000 in a bank account with 2% interest. If the inflation rate is 4%, then the actual value of their money has decreased. Even though the bank added ₱100 interest, the ₱5,100 saved now buys less than what ₱5,000 could buy a year ago. The saver feels punished for keeping money in the bank.Similarly, lenders—like banks or private individuals—suffer when they give loans at fixed interest rates but inflation unexpectedly rises. Suppose a bank lends ₱100,000 at 5% interest expecting inflation to be 2%. If inflation turns out to be 6%, the bank earns only 5% in nominal terms but loses in real terms because the money repaid has less purchasing power. This discourages lending or makes banks charge higher interest to protect themselves, which can slow down borrowing and investment.This matters to the economy because savings fuel investments. When people are confident that their savings will grow or at least retain value, they are more likely to save. When inflation erodes that value, they might choose to spend instead, which could cause further inflation. Also, if banks don’t lend because of inflation risks, businesses can't grow, and the economy slows down.In the Philippines, BSP tries to maintain inflation at a manageable level (2–4%) so savers and lenders feel secure. If not, financial institutions may collapse, trust in the banking system weakens, and people avoid formal financial services. That’s why stable inflation is essential not only for prices, but for overall economic confidence and growth.
