When the federal reserve engages in Open Market Operations, purchasing treasury securities or undertaking a repo, it gives liquidity to commercial banks. With this liquidity, or an effective increase in the money supply, the banks lower the cost of borrowing for other banks via the federal funds rate. The fed funds rate affects the prime rate at which banks loan money to the public. Examples of rates affected are mortgage rates, CDs, and the treasury rate. The fed funds rate has an almost perfect correlation with these rates. The result of the decrease in the cost of borrowing leads to an increase in spending and, therefore, an increase in prices.
If more money is chasing a product, the products price is bid upwards. Low interest rates promote borrowing larger amounts of money which creates more money in the economy. Low interest rates tend to boost large ticket items like houses more than low ticket items like socks because more people borrow to buy a house than to buy socks. Now some of this inflation trickles down because house builders wages are paid for by borrowing and they then can afford to buy more socks with the newly created money.
Lower interest rates means a larger cash flow. And since banks only have to hold a fraction of their deposits and loans in cash, that means the fed must adapt their monetary policy to produce this cash flow meaning more currency in circulation which leads to inflation. So low interest rates encourage borrowing which increases the rate of transfers between virtual (created) currency and hard (bills) currency. The fed must print more notes, thus inflation.
Yes, I think that by keep interest rates low it does cause inflation as lower interest rates cause a decrease in the value of the dollar bill. I think that with interest rates low and taking a significant bite out of the value and worth of the dollar bill that in turn increases inflation.
Higher interest rates cause the cost of running a business to rise. Prices rise to cover costs. These are the ingredients of the CPI; inflation occurs. The central banks current monetary policy places them in a position to increase rates when inflation rises i.e. when the cost of everything else is rising. But they know this will kill the economy. (Bad policy led by bad theory. ) So the only result is zero interest rates forever.
Inflation of prices can happen when the supply does not keep up with the demand, and the "theory" that lower interest rates puts more money in the economy, growing that economy. Increasing demand can raise prices, but only if the supply cannot keep up. The flip side of course the glut, or over supply in which producers produce more than will be bought, which is more likely to happen in bad times than good. In a real world that is not rigged, the increase in demand and cash availabilty improves and grows the economy and competition keeps the prices fair. Increasing the interest rates, with the increase of the debt that is caused by the raise, and inflation creating a bubble with an ever deepening basement in the economy. When interest rates are raised, the inequality ratio becomes even worse, as money is less available to the 99% - which then again as the coffers drain towards the 1% - who profit on investments and high interest rates rather than paying them.
Low interest rates will help bring balance to the nation by letting the poor catch up with their debts and since the poor are poor they will not effect the inflation rate and the rich do not really need credit because they are rich in fact they are the ones who are usually collecting the interest.
No I think that low interest rates do not cause inflation, and instead help the economy to grow. When interest rates are low people have more money to invest with, which will in turn stabilize inflation and make sure that it does not get out of control due to high interest rates.
Most central banks around the world try to set interest rates at a low, progressive state to prevent hyper-inflation. Raising interest rates won't always cause problems, but setting interest too high can add more money to the money-stock, which causes inflation. So no, low interest doesn't cause inflation. High interest does.