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I am trying to understand how interest rates are influenced by central banks purchasing government bonds.

When Googling "how does buying bonds increase interest rate" I find the following:

When the Federal Reserve buys bonds, bond prices go up, which in turn reduces interest rates. Source: Investopedia.com

I understand that interest rates would go up IF the central banks would print money to buy bonds. Because printing money would result in more money supply, and thus inflation, which the economy would compensate by raising interest rates.

But I do not understand how buying bonds WITHOUT printing money would influence interest rates.

I also understand that bonds are mostly a fixed return rate. And when a central bank purchases a lot of bonds the price of that bond increases and the return rates of those bonds decrease. But does a decrease in return rates automatically influence the interest rate? Ain't interest rates independently determined by money committees?

Basically I am just trying to understand how central banks can keep interest rates artificially low by buying bonds.

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    $\begingroup$ Your understanding is wrong. "Printing" money to buy bonds will not increase interest rates. The reason rates are so low now is because Central banks increased money supply and bought bonds. There’s an inverse relationship between bond yields and bond prices. When someone (central bank) buys bonds prices go up and yields down but when yields rise, bond prices fall. This is a function of supply and demand. When demand for bonds declines, issuers of new bonds are forced to offer higher yields to attract buyers. That reduces the value of existing bonds that were issued at lower interest rates. $\endgroup$
    – Alex
    Commented May 14, 2022 at 21:55
  • $\begingroup$ In reality, monetary policy is a lot more subtle and complicated. Stlouisfed offers a good intro into how interest rates are set at the moment. Bond buying is a broader aspect of monetary policy. $\endgroup$
    – Alex
    Commented May 14, 2022 at 22:06
  • $\begingroup$ Interest rates are inversely related to bond prices by definition. $\endgroup$ Commented May 16, 2022 at 15:31

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I understand that interest rates would go up IF the central banks would print money to buy bonds.

This is not generally correct. More money supply makes interest rates fall. Below you can see basic supply-demand model of money market. As clearly shown below expansion of money supply will reduce the interest rates, ceteris paribus.

enter image description here

Basically I am just trying to understand how central banks can keep interest rates artificially low by buying bonds.

Buying bonds does decrease interest rates because as shown above if money supply increases interest rate will drop.

Ain't interest rates independently determined by money committees?

I am not sure what do you mean by money committees. Interest rates on let's say deposits or other instruments can be selected by banks but they cannot do that willy-nilly. Profit maximizing firms can't really choose prices arbitrarily. If I would decide tomorrow to sell home made bread for \$1000 nobody would buy it because it would be well above the market price for home-made bread determined by supply and demand.

Similarly, banks can't price (i.e. decide on interest rate) their products willy-nilly. Any bank doing so would be outcompeted by other banks, so even though interest rate is bank’s choice variable it can't de facto be chosen freely. If the supply of money is large that will put downward pressure on the interest rate because of competition. If one bank won't lower their interest rates other will to capture its market share.

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