Advice To The Central Bank Of China About Inflation Rates (Coursework Sample)

THE GOVERNOR,
PEOPLE’S BANK OF CHINA (PBOC),
P.O. BOX 7850
BEIJING
RE CUT OF OF INTEREST RATES
The interest rates tend to set balance between savings and investment. Following the release of a statement regarding the cut of interest rates by the People’s Bank of China (PBOC) on its website, the issue that has generated mixed reactions from various sections of country. I wish to express my views on the same.
The main aim of any countries economy should be geared towards returning economic growth to sustainable levels. By cutting the interest rates the money circulation will increase the aggregate demand for general goods and services of which if not controlled will lead to inflation, hence beating the logic for economic growth. However, there may be other factors leading to economic contraction, for example, if there is global economic slowdown it may lead to a fall in exports which may outdo the minimal increase in consumer expenditure.
More so lower interest rates by the People’s Bank of China (PBOC) makes other banks also to decrease their interest rates attracting more stake holders and increase investment by encouraging consumers and firms to borrow loans. All this has a net effect of increasing the money in circulation leading to deflation. For money lenders like those dealing with securities like bonds they are likely to receive lower interests prompting the investors to move from bond market to equity capital. Hence investors get an opportunity to expand their businesses at lower costs. This is basically a psychological effect on investors and consumers as it leads to greater profits hence an expanded economy.
Another effect is lower mortgage interest payments. In this case there’s increased consumer spending due to more disposable income as a result of more money in circulation. The monthly mortgage repayments falls acting as bait for the consumers. This spurs economic development. For fixed rate mortgages the amount of monthly repayment remains the same. This is because most fixed rate mortgages operate on long term basis and are non fluctuating unlike short term rates. With adjustable mortgages the payments tend to decrease depending on the rate used to reset.
This being a deliberate policy to discourage saving, the bank offers lower interest rates such that people opt to hold onto their money, and also encourage borrowing. It has also been seen as a way of boosting the stock market and thus creating a wealth effect for individuals, and boosting confidence. However, there arise depreciation in exchange rate resulting to decreased demand for export and very high costs for imports.
In conclusion, I am in support with the People’s Bank of China (PBOC) cutting the interest rates as is more beneficial to an economy however; it is associated with several drawbacks. It discourages lenders that is, people with security like bon...