Effects of Changes of Interest Rates & Inflation

Topics: Inflation, Central bank, Monetary policy Pages: 8 (2140 words) Published: September 8, 2010



The impact of the change interest rates and inflation has a persistent impact on the well being of any given society. For this purpose it is the understanding that each individual in society should have an understanding of what such changes bring fourth for the man on the street. In this introduction, we are going to introduce certain key points to remember when dealing with interest rate- and inflation changes.

Inflation is a sustained increase in the general level of prices for goods and services When inflation goes up, there is a drop in purchasing power of money Variations on inflation include deflation, hyper inflation and stagflation The cause of inflation is defined in two theories namely Demand-pull inflation and Cost-push inflation When there is anticipated inflation, creditors and people earning a fixed income loose, costs goes up - people are less likely to spend money and exporting of goods drop The lack of inflation (or deflation) is also not necessarily a good thing Inflation is measured with a price index

Price Indexes are categorized as Consumer Price Index and Producer Price Index Interest rate changes are decided by the Central Bank in South Africa and enforced by Bank of Namibia In the long run, stocks are good protection against inflation Inflation is a serious problem for fixed income investors

Inflation-indexed securities offer protection against inflation, but offer low returns.

Taking into consideration the key points to remember, one can now safely define what interest rates and inflation means:

# Interest Rate:
A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often changes as a result of inflation and Central Bank and Bank of Namibia policies.

# Inflation:
“A persistent increase in the level of consumer’s prices or a persistent decline in the purchasing power of money.” Since inflation is a national average of all prices, it may differ considerably from the rate experienced by any particular household.


In this assignment, it is envisaged that by studying this report, the reader should have:

A clear and concise understanding of the impacts changes in interest rates and inflation have on the society To create awareness of the impacts changes in interest rates and inflation have on the society


In pursuit of information on this very important topic, the research team engaged in what methods to be used to ensure that the correct information is gathered to provide a brought understanding of the impacts of interest rate- and inflation rate changes for the reader and/ or user of this report.

Beneath is a layout of the plan used by the research team

Structure/ design of research

The team concluded that information will be collected systematically to create a gradually impression of the topic under research Team members were task to perform specific tasks in the gathering of the information required. Consistency in the process was very important and time frames were connected to the gathering of information.

Methods used to ensure accuracy of information

Studies done by accredited institutions as available on the Internet Brochures published by the Bank of Namibia and other Financial Institutions based on the economic situation of the country News paper articles provided by recognized economists

Other methods considered

Interviews with selected members of the banking society and financial institutions Telephonic conversations with credible persons identified who specialize in the field of interest rate...
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