• Interest Rate, Inflation, Earnings and the Market.

Topics: Inflation, Interest rate, Monetary policy Pages: 13 (4217 words) Published: May 13, 2012
Impact of interest rate on Market
Interest rate is one of the most prominent macroeconomic factors among many other macroeconomic factors. It has direct impact not only on our market but also on other macro economic factors like inflation, money supply and investment. Government uses this powerful tool to control money supply, inflation, recession, employment and also investment pattern. Over all, we can say that through interest rate government controls the economic phases of a country. Now in question of impact on market; interest rate directly affects the stock market, bond market and commercial Bank. Interest rate spread has direct impact on commercial bank and over all investment because people usually borrow from commercial bank and slight change in interest rate has much higher effect highly on commercial bank and also investment pattern of country. Impact on Commercial Bank

Actually interest rate spread (IRS) effect on commercial bank. Because bank’s overall profit and people borrowing trend or we can say investment trend depend on lending rate and bank’s expense depends on borrowing rate. At first l will like to discuss about the interest rate regulation and mainly about the interest rate reform policy of Bangladesh. After this policy has been taken interest rate movement has become transparent and logical. Interest Rate Reforms

Bangladesh began to implement financial sector reform measures in the 1980s and the interest rates were partially deregulated in November 1989 to introduce flexibility in determining deposit and lending rates. As a part of the process, Bangladesh Bank started to set the ceilings and the floors and individual banks were allowed to set their interest rates within the stipulated band. In April 1992 the interest rate bands for lending were removed for all sectors except agriculture, small industries, and exports while, for deposits, the ceilings were removed but the floors were retained. In this context, it is important to recognize that although deregulation of interest rates is often considered a major element of financial sector reforms, market determined interest rates are necessary but not sufficient for developing an efficient financial system. In an underdeveloped financial market, a gradual approach to interest rate deregulation is suggested in order to avoid instability. Change in interest rate spread (IRS): In recent years, IRS has showed a somewhat declining trend (Table I). The spread between weighted average lending and deposit rates of all banks declined by 1.91 percentage points between June 2001 and March 2009, while the average deposit rate increased by 0.49 percentage points and the lending rate declined by 1.42 percentage points over the same period. Since the lending rate declined through the period we can say it indicates that the investment pattern in our country has also increased through the same period because lower lending rate usually attracts investor. Not only that but also deposit rate has increased through the period which also indicate consumer welfare. Since deposit rate increased so we can say consumer are now more attracted to deposit in bank and definitely it proved that consumer are now gaining more than past. The IRS, however, differs across different bank groups. The IRS was the highest for FCBs at 9.48 in March 2009, followed by 4.58 for PCBs, 3.63 for SCBs, and the lowest of 2.99 for SBs. Overall, it appears that the FCBs gained the most from high IRS that resulted from low deposit rates, high lending rates, and their better quality of loan portfolio. On the other hand, SCBs and SBs incurred larger losses or earned lower profits. TABLE- I (RECENT MOVEMENTS IN IRS IN BANGLADESH)

Period| Weighted average of all banks| IRS by bank groups| | Deposit rate| Lending rate| IRS| SCBs| SBs| PCBs| FCBs| 2001| 7.03| 13.75| 6.72| 5.98| 4.86| 8.95| 7.88|
2002| 6.74| 13.16| 6.42| 5.74| 5.11| 7.23| 7.83|
2003| 6.30| 12.78|...
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