Market Talk – May 30, 2023
ASIA: Consumer prices in China increased at their slowest pace in two years, indicating deflationary pressure and weakness in domestic demand. The consumer price index rose by only 0.1% in [...]
Inflation – Deflation – Interest Rates
QUESTION:
Is there a correlation between the GDP rate and interest rate ?
Best regards,
BL
ANSWER: No. What central bankers fail to take into consideration is that the interest rate is the OPPORTUNITY COST of money as reflected into the future. This is why interest rates naturally decline during a recession because of the future expectation of what money will buy when it returns. If inflation is say 10%, then lenders demand at least that much back plus a profit. Interest rates reflect the inflation rate (opportunity cost of money) plus a profit.
Deflation is when the purchasing value of money rises and tangible assets fall in value. This is also reflected in the drop of interest rates. Often, rates have gone negative for brief periods when people are parking money while expecting it to buy more. They are willing to pay to park their money just to know it will buy more tomorrow.
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