Central banks, such as the Bangladesh Bank, may cap interest rates for a variety of reasons. One of the main reasons is to control inflation. When interest rates are too high, borrowing and spending can slow down, which can lead to a decrease in economic growth and an increase in unemployment. On the other hand, when interest rates are too low, borrowing and spending can increase, leading to an increase in inflation.
Capping the interest rate can help central banks keep inflation within a target range. By setting a cap on interest rates, the central bank can influence the overall level of interest rates in the economy, making borrowing and spending more or less expensive. This can help the central bank achieve its inflation target and keep the economy stable.
Another reason that central banks may cap interest rates is to promote economic growth. By keeping interest rates low, central banks can encourage borrowing and spending, which can help to increase economic activity and create jobs.
It's also worth mentioning that Central bank also caps Interest rate to control the flow of money in the economy and avoid overheating of the economy which can lead to inflation and other economic instability.
It's important to note that interest rate policy is a complex matter and the decision to cap interest rates is made after considering multiple factors including inflation, economic growth, and other monetary indicators.
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