• Because of Government monetary policy. Interest rates may be increased to reduce the flow of money in the economy.
• Because of Government exchange control policy. If inflation is making it more difficult to export, and encouraging an increase in imports, the Governments may intervene by raising domestic interest rates. This would encourage a flow of foreign investment into the domestic market and improve the exchange rate.
• Because of a reduced propensity to save – at a time when inflation is eroding the value of any funds not consumed immediately. This could lead banks and other financial institutions to raise their interest rates so as to attract more deposits.
     (Any 2 points)

High or fluctuating interest rate cause difficulties in business financing for the following reasons:

• They make it more difficult to obtain funds. In particular, companies will be reluctant to raise fixed interest borrowing if they fear that interest rates are likely to fall. Even overdraft finance will be expensive though still preferable since the interest rate is not fixed;
• They may cause liquidity problems. High interest rates make business operations difficult throughout the economy. Consequently, debtors are more slow to pay, while creditors increase the pressure for quick settlement of their accounts;
• They make it more difficult to draw up plans and budgets. Cash flow becomes more uncertain and interest charges vary, not only with fluctuations in interest rates, but also a consequence of there being less liquid funds available.        (Any 2 points)
  

• Liquidity problems will make it necessary to look carefully at the level of current assets held. This may involve reducing the amount of buffer stocks, tightening credit terms and even realizing investments.
• The difficulties of obtaining long-term finance may make it impossible to replace fixed assets. It may even be necessary to dispose of fixed assets to generate liquid funds.