Interest Rate Policy on Financial System Stability
Keywords:
Interest Rate Policy, Financial Stability, Monetary Policy, Banking, MacroprudentialAbstract
Interest rate policy is a primary instrument of monetary policy, playing a strategic role in maintaining economic and financial system stability. Changes in interest rates affect not only inflation and economic activity but also the behavior of financial institutions, liquidity conditions, credit disbursement, banking asset quality, and financial market stability. This article aims to analyze the impact of interest rate policy on financial system stability and to identify the challenges monetary authorities face in balancing price stability, economic growth, and financial sector resilience. The study employs a normative-juridical method, utilizing both statutory and conceptual approaches. It analyzes the interrelationship between interest rate policy, monetary policy transmission mechanisms, and systemic risk within the financial sector. The findings indicate a significant relationship between interest rate policy and financial system stability. While interest rate hikes can strengthen price stability and anchor inflation expectations, they simultaneously risk increasing financing costs, dampening credit demand, raising the risk of non-performing loans, and intensifying liquidity pressures in the financial sector. Conversely, lowering interest rates can stimulate credit expansion and economic activity; however, excessive rate cuts may heighten the risk of asset bubbles and debt accumulation. Therefore, the effectiveness of interest rate policy requires coordination between monetary policy and macroprudential policy to foster sustainable financial system stability.References
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