Lower interest-rate might be correlated to higher supply and lower prices...

The scarcity of capital depends upon the scarcity of investment goods and services, and, consumption goods and services since a rise in the price-level would prompt the central bank to increase interest-rate and reduce demand, consumption and investment, in order to reduce fall in the value of money and demand when supply cannot be increased in the short-run. The central bank tries to control demand in case of lower supply to keep prices in check. However, if we have space for increasing supply then the central-banks may reduce the interest-rate to improve supply and control the price-level or inflation. Therefore, the first task before a central banks is to determine whether the inflation is supply-side induced or the demand-side because a supply-side solution in case of higher demand and inflation seems more feasible than to control inflation by reducing demand which diverts the economy from a higher growth trajectory. A lower interest-rate regime may also increase supply and lower prices depending upon the actual availability of goods and services in the economy. Therefore, the central-banks must try to control demand when there is no scope of increasing supply of goods and services. Nevertheless, lower interest-rate might be good for the supply-side (investment) and the demand (consumption) side too. Therefore, if lower interest-rate increases supply or productivity to lower inflation instead of just demand and inflation it should be welcomed. Conventionally, higher money-supply and lower interest-rate is supposed to stoke demand and inflation in the event of supply shortage, but, how the central banks can ignore that the same interest-rate which controls demand is also responsible for increasing the supply because lower capital cost might be significant for it. Keynes said that capital is not that scarce as compared to other factors of production since the central banks could resort to printing money when there is a need and its real scarcity depends on the real availability of investment and consumption goods and services in the economy. The capital is scarce because other things are scarce. In a big economy like INDIA how inflation is explained with so much of unutilized resources and excess capacity, its inflation might be attributed to low investment and supply compared to high demand which could be incentivized through lower interest- rate. The central banks try to contain demand and inflation in the short-run when the long-run objective is to keep prices low by lowering the cost of credit and increase supply. Increasing interest-rate and reduce demand and inflation in the short-run is a short term strategy, however improving the supply-side and demand too by lowering the interest-rates might increase inflation in the short-run but would also increase supply. The interest-rate in the developed world has shown a downward bias in the long-run and it is an assumption that interest-rate in the developing and the developed world would converge in the same direction in the long-run. In many of the developed countries with low population growth rates the interest-rates have remained around zero in the past several years with deflation. Japan is now a classic example of economies with zero-lower-bound or liquidity-tarp and deflation for the past two decades. In the developed world the improvement in the supply-side due to lower interest-rate has made the price-level less volatile and less volatility has also kept the interest- rate low. The example of the developed countries shows that in the long-run supply-side has improved much to keep the prices stable when interest-rates are at rock-bottom.