Effect of Interest Rates on Economic Growth in Bangladesh
The interest rate is the amount of interest paid by a borrower to a lender and is set by the central bank of a certain country. Interest rate is regarded as a key variable affecting savings and investment. The interest rate which is set by the central bank is called the base rate. The base rate affects the aggregate output. Thus, the study examined the effect of interest rates on economic growth in Bangladesh. The study did a literature review to have an overview of what others found regarding the effect of interest rates on economic growth. Based on the findings of the study, it was revealed that interest rates affect economic growth. The reduction of interest rates increases economic growth. If the interest rate is good, it keeps output growth high. The study discovered that low rates of interest help the economy grow since people can get more money to make purchases and invests in businesses, thus spurring economic growth. Access to loans from financial institutions depends on interest rates. A country cannot grow if the cost of borrowing is very high and this is significantly influenced by the interest rates. The study also noted that when the base rate increase, the interest rates from the financial institution also increases. Hence, interest rates affect the economic growth in Bangladesh. High rates tend to reduce the pace of economic development. The research concluded that interest rates should be made at a reasonable rate to spur economic growth. The study recommended that the central bank in Bangladesh, Bangladesh Bank, should develop policies and frameworks that will ensure the interest rates are key as low as possible. The government needs to embrace policies that will aid Bangladesh control interest rates and raise money circulation in the economy.
Keywords: Interest Rates, Economic Growth, Bangladesh
Blanchard, O. (2019). Public debt and low interest rates. American Economic Review, 109(4), 1197-1229. https://doi.org/10.1257/aer.109.4.1197
Brand, C., Bielecki, M., & Penalver, A. (2018). The natural rate of interest: estimates, drivers, and challenges to monetary policy. ECB Occasional Paper, (217). https://doi.org/10.2139/ssrn.3328536
Dutta, U. P., & Saikia, B. (2022). Remittances and Economic Growth: Empirical Analysis from a Panel of Selected Asian Nations. Millennial Asia, 09763996221086745. https://doi.org/10.1177/09763996221086745
Eggertsson, G. B., Juelsrud, R. E., Summers, L. H., & Wold, E. G. (2019). Negative nominal interest rates and the bank lending channel (No. w25416). National Bureau of Economic Research. https://doi.org/10.2139/ssrn.3334966
Feldkircher, M., Huber, F., Punzi, M. T., & Chantapacdepong, P. (2021). The Transmission of Euro Area Interest Rate Shocks to Asia--Do Effects Differ When Nominal Interest Rates are Negative? Emerging Markets Finance and Trade, 57(13), 3818-3834. https://doi.org/10.1080/1540496X.2019.1709438
Ferrari, A., Masetti, O., & Ren, J. (2018). Interest rate caps: the theory and the practice. World Bank Policy Research Working Paper, (8398). https://doi.org/10.1596/1813-9450-8398
Ginting, E. S., Hutasoit, A. H., & Peranginangin, N. (2021). North Sumatra Economic Growth Analysis. Journal Mantic, 5(1), 184-190.
Hoang, T., Thi, V., & Minh, H. (2020). The impact of exchange rate on inflation and economic growth in Vietnam. Management Science Letters, 10(5), 1051-1060. https://doi.org/10.5267/j.msl.2019.11.004
Kholodilin, K. A., & Netšunajev, A. (2019). Crimea and punishment: the impact of sanctions on Russian economy and economies of the euro area. Baltic Journal of Economics, 19(1), 39-51. https://doi.org/10.1080/1406099X.2018.1547566
Latsos, S., & Schnabl, G. (2021). Determinants of Japanese household saving behavior in the low-interest rate environment. The Economists’ Voice, 18(1), 81-99. https://doi.org/10.1515/ev-2021-0005
Mayer, T., & Schnabl, G. (2021). Covid-19 and the euthanasia of interest rates: A critical assessment of central bank policy in our times. Journal of Policy Modeling, 43(6), 1241-1258. https://doi.org/10.1016/j.jpolmod.2021.04.004
Miles, D., & Monro, V. (2021). UK house prices and three decades of decline in the risk-free real interest rate. Economic Policy, 36(108), 627-684. https://doi.org/10.1093/epolic/eiab006
Mohsen, A., Sadat, S. F., & Haidery, J. (2021). Effects of the macroeconomic variables on GDP growth of Afghanistan. Journal of Economics, 4(2), 16-31
Palley, T. I. (2019). The fallacy of the natural rate of interest and zero lower bound economics: why negative interest rates may not remedy Keynesian unemployment. Review of Keynesian Economics, 7(2), 151-170. https://doi.org/10.4337/roke.2019.02.03
Sartipi, F. (2021). Negative interest rate: Way to tackle inflationary housing prices. Journal of Construction Materials, 2 (1) 14-29. https://doi.org/10.36756/JCM.v2.4.1
Sharpe, S. A., & Suarez, G. A. (2021). Why isn’t business investment more sensitive to interest rates? evidence from surveys. Management Science, 67(2), 720-741.
Talha, M., Sohail, M., Tariq, R., & Ahmad, M. T. (2021). Impact of oil prices, energy consumption and economic growth on the inflation rate in Malaysia. Journal of Finance and Economics, 44(124), 26-32.
Williamson, S. (2018). Inflation control: do central bankers have it right? Journal of Economic and Management, 18(4), 19-29. https://doi.org/10.20955/r.2018.127-50