why is it the reserve bank has the power to put up interest rates and where does all the extra money go?

Question

the reserve bank puts up the interest rates then lending banks do likewise, but where does all this extra money from the interest hikes go?A shop floor worker or factory worker cannot give himself a wage rise so why should the bank-any bank have the right to put up interest rates which ultimately brings more money to the bank.why does not the government put on a price freeze nationally.interest rates going up really means the people need to make more to pay extra to the banks.so prices go up to make more profits-so there we have inflation i cannot see the logic

Answer 1

The fed nor the banks have the POWER per se. I find you asking that question peculiar. Anyways. Interest rates are subject to the laws of supply and demand. So, there you go. Of course the FED can sets the interest rate, but, all prices start out like that. E.g when McDonald's introduces a new product, the first price is not a predicate of supply and demand. Nor, can the set interest rate be. It is set, then it adjust as such. The Fed does not have complete control over banks, and thus, do not have complete control over interest rates!

Answer 2

Bank are not lending out their own money but the money of their depositors. When there is a high demand for loans they offer higher interest on deposits to attract more funds. This extra cost is passed on the borrowers. The Federal Reserve lowers the market interest rate by supplying extra funds to banks, by buying government bonds from them, "creating new money". But If they create too much new money in order to keep rates low, we get inflation, and prices rise so people are not better off. High interest does not cause inflation, it prevents it. Banks actually make a bigger profit when rates are low or falling than when they are high, Right now the news is full of stories about the problems banks are having and bank stocks are down 20% ,

Answer 3

its their way of collecting as payment for their services.