How does deflation affect interest rates?

Deflation can have a significant impact on interest rates. When prices are falling, it can lead to a decrease in demand for goods and services, which can in turn lead to a decrease in demand for loans. As a result, lenders may lower interest rates to encourage borrowing and stimulate economic activity. Additionally, deflation can increase the real value of debt, making it more difficult for borrowers to repay loans. This can lead to an increase in loan defaults, which can further depress economic activity and lead to lower interest rates. Overall, deflation can have a complex and multifaceted impact on interest rates, but it generally tends to push them lower.

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