Interest vs inflation

[-------owned-------]

Hello,

I'd like to start off by again apologizing for my username, something made up when I was a lot younger. To get to the point though, I recently debated with my economics teacher about how interest rates influence inflation; her claim was that the higher the interest is, the lower the inflation will be, as people will refrain from taking loans for 'hobby'-consumption.

Granted that the above seems logical to some extent, I have some issues with it, which I also brought up with her. Her only response, however, was that I was wrong with no explanation whatsoever, so I thought I'd bring it here considering we have some shrewd people here. The first issue I encountered was the lack of a nation with a high interest rate and a low inflation. The second is that I don't see the full picture of it; most people with loans borrow money to buy property, right? In order to afford the new state-issued interest rates, will they not have to demand a higher salary, and consequently companies will have to raise their prices? Living in Sweden, I have a relative who owned a factory thirty or so years ago and interest rates rose to 18% and they eventually had to close, but I would love your opinion on the matter.

Thanks,

 

[Palooza]

Interest rates highered mean that:
Cost of borrowing will raise - Ie mortgage repayments increase and therefore people have less disposable income and therefore don't buy as much and therefore there is less demand-pull inflation (Lowering it will do the oposite). People won't demand higher wages, well they might, but probably won't be successful, so not much chance of cost-push inflation.

Increase the reward of saving - People get more of a return for saving, and therefore people are less incentivised to spend = less demand-pull inflation.

Your countrys currency value will increase - Meaning that you will get more inports than exports due to your currency being worth more and youre country becoming less competitive; meaning less demand-pull inflation.

Interest rates only really affect demand pull inflation, and aren't the sole determinent of inflation but it does play a big part in it, generally your teacher is correct.

 

[-------owned-------]

Interest rates highered mean that:
Cost of borrowing will raise - Ie mortgage repayments increase and therefore people have less disposable income and therefore don't buy as much and therefore there is less demand-pull inflation (Lowering it will do the oposite). People won't demand higher wages, well they might, but probably won't be successful, so not much chance of cost-push inflation.

Increase the reward of saving - People get more of a return for saving, and therefore people are less incentivised to spend = less demand-pull inflation.

Your countrys currency value will increase - Meaning that you will get more inports than exports due to your currency being worth more and youre country becoming less competitive; meaning less demand-pull inflation.

Interest rates only really affect demand pull inflation, and aren't the sole determinent of inflation but it does play a big part in it, generally your teacher is correct.

While I do get the incentive of saving part, company owners will as well need to increase their prices in order to keep up their loans, as well as house owners who need an increased salary (thus leading to increased prices as well), and honestly, I fail to see how people will lower their consumption enough to cover up for this. Does a nation with a low inflation and a high interest rate exist?

 

[Palooza]

While I do get the incentive of saving part, company owners will as well need to increase their prices in order to keep up their loans, as well as house owners who need an increased salary (thus leading to increased prices as well), and honestly, I fail to see how people will lower their consumption enough to cover up for this. Does a nation with a low inflation and a high interest rate exist?

When demands low, instead of rising their prices and then getting no sales, they simply make people unemployed to cut back on costs, and not have excess labour (Derived demand).