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Why does interest on checking accounts increase with increasing inflation?
Wiki User
∙ 12y ago
Example : you have Rs. 100 to spend you have invested in bank . the bank give you 5% interest so that now you will earn 105 Rs. on your investment. current inflation is 2% that means you are paying 2% and your bank gives you 5% so (5-2) 3% is your profit you are generating extra Rs. 3 on your investment in bank
Now the inflation rate increases to 6 % and your bank still gives you 5% on the checking account while investment made in mutual fund gives you return of 8% than
Bank (5%-6%)= Loss of 1%
Mutual Funds (8%-6%)= Profit of 2%
So to overcome effect of inflation and to stay in the competition with other investment and to regulate banking operation the bank will increase interest on checking account to keep investors investing in bank.
Wiki User
∙ 12y ago
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