Readers Question: Interest Rates are increased by the governments to bring down inflation rates, this makes exports price competitive as well, as a result, exports increase. However, an increase in interest rates can lead to an appreciation of the currency as demand for the currency increases. So this again increases the price of exports as the value of the currency increases. So I want to know whether an increase in interest rates improves the current account or worsens the current account.
The impact of an increase in interest rates on the current account balance of payments is uncertain. There are a few different implications. Interest rates affect both consumer spending (imports) and have an affect on the exchange rate (which affects the price of exports/imports) The effect of interest rates on the current account depends on which factor proves the most powerful. It is not possible to say definitely whether the current account will improve or worsen. – It depends.
An increase in interest rates on macroeconomy
- Reduces consumer spending – (higher interest rates make it more attractive to save, and less incentive to borrow; therefore, this leads to lower disposable income after paying increased mortgage costs). Lower consumers spending will lead to lower import spending and therefore improve the current account
- Reduce inflation. Higher interest rates help reduce inflation making exports more competitive – improving current account
Exchange rate effect
- Higher interest rates lead to hot money flows and an appreciation of the exchange rate. This makes exports more expensive and imports cheaper. This tends to worsen the current account (assuming demand is relatively pricing elastic)
Which effect will be strongest?
In the UK, a rise in interest rates may often improve the current account because:
- Typically, the UK has a high propensity to spend on imports. A reduction in consumer spending could have a big impact on reducing import spending.
- Demand for exports is relatively price inelastic. Evidence suggests that movements in the exchange rate don’t have a big impact on demand for exports, suggesting in the short term at least, demand is inelastic.
Examples of current account and interest rates
In 1989, the UK has a current account deficit of 5% of GDP. This reflects a period of strong economic growth, inflation and rising import spending.
However, because of the inflation, the government increased interest rates. This contributed towards the recession of 1991/92. As the economy slowed down, import spending fell and the current account improved.
The high-interest rates didn’t cause an appreciation – because markets felt the exchange rate was already overvalued.
The current account depends on many factors other than interest rates. This includes:
- Relative inflation rates. Higher inflation in the UK would make UK goods less competitive
- Stage of the economic cycle. Strong consumer spending will increase imports
- Nature of economy. If the economy is weighted towards export-led growth, then the economy may run a current account surplus – no matter what happens to interest rates. The UK has mostly run a persistent current account deficit since 1980, due to the process of deindustrialization.
"Msemaji: ""Sehemu ya fedha zinazotumiwa na serikali ni za kuimarisha uchumi wa nchi, na hivyo kuongeza bei ya bidhaa zinazouzwa nje ya nchi." Hata hivyo, ongezeko la viwango vya riba linaweza kusababisha thamani ya sarafu kama mahitaji ya sarafu huongezeka. Kwa hiyo hii tena huongeza bei ya mauzo ya nje kama thamani ya sarafu huongezeka. Kwa hiyo, ni muhimu kujua kama ongezeko la riba linaweza kuharibu akaunti ya sasa au kuboresha akaunti ya sasa. Athari ya ongezeko la viwango vya riba juu ya usawa wa malipo ya akaunti ya sasa ni uhakika. Kuna mambo machache tofauti yanayohusika. Kiwango cha riba huathiri matumizi ya watumiaji (uagizaji) na kiwango cha ubadilishaji (kile kinachohusika na bei ya uagizaji) athari ya viwango vya riba kwenye akaunti ya sasa inategemea ni nini sababu inathibitisha kuwa na nguvu zaidi. Haiwezekani kusema kwa uhakika kama akaunti ya sasa itaboresha au kuharibika.  Inategemea. Ongezeko la viwango vya riba juu ya uchumi wa jumla - hupunguza matumizi ya watumiaji <unk> (viwango vya riba vya juu hufanya iwe ya kuvutia zaidi kuokoa, na motisha kidogo ya kukopa; kwa hivyo, hii inaongoza kwa mapato ya chini baada ya kulipa gharama za kukodisha zilizoongezeka). Kupunguza matumizi ya watumiaji itasababisha kupunguza matumizi ya uagizaji na kwa hivyo kuboresha akaunti ya sasa - Kupunguza mfumuko wa bei. Viwango vya riba vya juu husaidia kupunguza mfumuko wa bei na kufanya mauzo ya nje ya ushindani zaidi <unk> kuboresha akaunti ya sasa Athari ya kiwango cha ubadilishaji - Viwango vya riba vya juu husababisha mtiririko wa pesa moto na tathmini ya kiwango cha ubadilishaji. Hilo hufanya mauzo ya nje yawe ghali zaidi na mauzo ya nje yawe ya bei nafuu. Hii inaelekea kuharibu akaunti ya sasa (kufikiri mahitaji ni kiasi bei elastic) Ambayo athari itakuwa nguvu zaidi? Katika Uingereza, ongezeko la viwango vya riba mara nyingi inaweza kuboresha akaunti ya sasa kwa sababu: Kwa kawaida, Uingereza ina mwelekeo mkubwa wa kutumia kwa uagizaji. Kupungua kwa matumizi ya watumiaji kunaweza kuwa na athari kubwa kwa kupunguza matumizi ya uagizaji. - Mahitaji ya mauzo ya nje ni kiasi bei inelastic. Uthibitisho unaonyesha kwamba harakati katika kiwango cha ubadilishaji hazina athari kubwa kwa mahitaji ya mauzo ya nje, ikidokeza katika muda mfupi angalau, mahitaji ni inelastic. Kwa mfano, katika mwaka wa 1989, Uingereza ilikuwa na upungufu wa akaunti ya sasa wa asilimia 5 ya Pato la Taifa. Hii inaonyesha kipindi cha ukuaji mkubwa wa kiuchumi, mfumuko wa bei na ongezeko la matumizi ya uagizaji. Hata hivyo, kwa sababu ya mfumuko wa bei, serikali iliongeza viwango vya riba. Hii ilichangia kushuka kwa uchumi wa 1991-1992. Kadiri uchumi ulivyopungua, matumizi ya uagizaji yalipungua na akaunti ya sasa iliboreshwa. Viwango vya juu vya riba havikusababisha tathmini kwa sababu masoko yaliona kiwango cha ubadilishaji tayari kilikuwa kimepinduliwa. Akaunti ya sasa inategemea mambo mengi mbali na viwango vya riba. Hii ni pamoja na: - Viwango vya ulaghai wa jamaa. Mfumuko wa bei nchini Uingereza unaweza kuwa na athari kubwa kwa bidhaa za Uingereza, na inaweza kuwa na athari kubwa kwa uchumi wa nchi. Matumizi ya watumiaji yenye nguvu yataongeza uagizaji - Asili ya uchumi. Kama uchumi ni uzito kuelekea mauzo ya nje inayoongozwa na ukuaji, basi uchumi inaweza kukimbia ziada ya akaunti ya sasa <unk> bila kujali nini kinatokea kwa viwango vya riba. Tangu mwaka 1980 Uingereza imekuwa na upungufu wa fedha za kawaida kwa sababu ya mchakato wa kuondolewa kwa viwanda.