Second, when the economy grows too fast and the economy is overheated, it is necessary to raise the interest rate level and curb the excessive and blind growth of the economy.
Generally speaking, the main reason why banks raise deposit and loan interest rates is because of insufficient deposits or excessive loans. For example, banks only have 500 million RMB deposits but have to deal with more than 500 million loans, which leads banks to raise deposit and loan interest rates to attract deposits and reduce deposits to ensure the balance between deposits and loans and maintain the balance of the national economy. In addition, when the national economy is overheated, the interest rate will generally increase, because it can reduce the national investment in stocks, futures and gold, attract overheated funds to bank deposits, so as to alleviate the overheating of investment, and interest rate is also used as one of the three most important financial means of macro-control to regulate the stable development of the economy.
The most direct analysis is that during the economic boom, the economy will be very hot and the return on investment will be very high. Interest rate is essentially the opportunity cost of holding cash. If the investment income of market economy is higher than the current market interest rate, the interest rate will adjust itself to reach the level of market investment interest rate to meet the market requirements.
Interest rate is the price of capital and the cost of borrowing, and it is a crucial variable in economic activities. For more than a century, many economists have devoted themselves to studying the relationship between interest rates and real economic sectors. However, as the core of financial variables, the theoretical circle has long been divided on the extent and direction in which interest rates interact with the target variables of the real economy. The representative figures are Keynesian school, financial deepening school of financial structuralism and Swedish school of early important theory.
The mainstream economics school, represented by Keynesian school, has always emphasized the inverse relationship between interest rate and actual economic growth. Keynes (1936) put forward the theory of liquidity preference r in 1930s, which holds that the return of physical investment is "marginal efficiency of capital" and the investment cost is the interest rate level. The nature of diminishing marginal efficiency of capital determines that the interest rate level must be reduced accordingly to ensure the profit of physical investment, otherwise there will be insufficient investment demand and then lead to economic recession. The psychological factors of "diminishing marginal efficiency of capital" and "liquidity preference" determine that the government must adopt monetary policy and expansionary fiscal policy with interest rate reduction as the main factor to expand demand and stimulate output increase.