When the interest rate is high, it lowers the rates of inflation. The value of the currency is increased, and there are more investments done. Thus, it will result in lower prices for the goods and services, and people will spend more which is a benefit to the economy. Higher interest rates minimize levels of liquidity in the marketplace. The attractive interest rates encourage citizens to make investments instead of hoarding. Therefore, more money is pumped into the economy (Melicher & Norton, 2013). The banks are also willing to give out loans to interested parties since they will receive a higher return. Higher interest rates result in higher cost of debt, causing a severe effect on the equity market. When the debt rates are high, it can result in the bankruptcy of a business, making the investors' loss their equity.
High-interest rates have several effects on the business environment. Business operations will start to decrease over time since capital expenditure will reduce with the increase in the cost of debt. More people will have loans, and that will increase the level of debts, which will result in cutting down commercial use. Since the interest rates will be high, there will be more investments done to the bond market. It will be due to the associated high returns (Melicher & Norton, 2013). Liquidity in the market will be reduced, and that will slow business down since there will be less money to be spent, which may end up stabilizing the economy. The cost of goods and services will be lower, and that will cause economic growth since people will be willing to buy more since they can. It will also result in savings and maintaining international competitiveness.
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Reference
Melicher, R. W., & Norton, E. A. (2013). Introduction to Finance: Markets, investments, and financial management . John Wiley & Sons.
