interest rates decreasing the rate of interest

Question

Interest rates

• Decreasing the rate of interest may not encourage investment but increasing the interest rate tends to lock up liquidity in the financial system.

• Governments may also be unwilling to put up interest rates because, as so many voters are house buyers, this is extremely unpopular.

• With a large national debt to service, governments are less willing to raise interests rates as this will raise their own expenditure.

• Finally, with so may foreign deposits in their monetary system (sector), each percentage rise in interest rates means a drain of foreign currency on the balance of payments.