How does raising interest rates reduce inflation? - Crypto in Plain English - Episode 286 - by cryptohunt.it

How does raising interest rates reduce inflation?

Welcome to the Cryptohunt Jam, where we spend one minute a day to explain crypto. In plain English.

When the economy cools down, crypto prices usually drop, so it’s important to get an understanding of the forces at work here. In the last two episodes we explained what money actually is, and how inflation works.

Today, let’s talk about what central banks do to bring inflation back down and why it’s hurting crypto so much right now.

You’ve probably heard this a million times: central banks are raising interest rates to reduce inflation. But how does that work… and does it actually work?

Think of central banks like these really big lenders and borrowers. They lend commercial banks incredibly large sums of money, and those pass them on to you. And because central banks control the money, they can set their own interest rates it charges to your bank.

When the central bank decides to raise those, your bank passes that increase on to you as well. Borrowing money is getting more expensive. And not just for you, for everyone - people and companies. Take the housing market for example: Mortgage rates increase, less people buy houses, real estate agents make less money, and go out for dinner less. Now the waiters are getting less tips. Everyone is becoming a little poorer.

And that suffering is by design: Because when people buy less, demand drops, and so do prices. In theory, at least, inflation falls.

You will have noticed though: That’s not working right now. Strange right? Well, remember from last episode: Demand isn’t the only thing affecting prices. We are also having large issues with the cost of goods, caused by the energy crisis and pandemic supply chain issues. Manufacturers simply can’t sell them for much less.

And so it seems, at least for now, that central banks are causing pain to fix the wrong side of the problem. Well intended, but ineffective, because that’s all they can do. But what they are certainly achieving: Getting people to pull investments out of crypto, making those prices come down along with the markets.

And that’s how it’s all connected. And tomorrow, we’ll take a look at what the central bank thinks about crypto… because they have thought about it a lot recently.

This podcast is produced by Cryptohunt.it the easiest place to learn crypto. Copywriting is done by Arndt Voges, Social Media is done by Brett Holleman, Design is done by Carmen Rincon and my name is Christian Byza, Co-Founder of Cryptohunt and I am your host of this daily show.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.