Credit Cycle

Credit cycle refers to the cycle of accessability of credit to borrowers.  At the first stages of the cycle, credit usually becomes more and more available to borrowers. Interest rates fall as well and the economy prospers. At a certain point, credit starts tightening for any various number of reasons and the amount of credit available to borrowers contracts. Interest rates rise and lending standards become more strict.

Credit cycles are influenced by people’s perceptions and central bank policy(and many other factors). When lending is perceived to be low risk, credit is plentiful, and vice versa. Central banks  sometimes attempt to take countercyclical measures, i.e. tightening during credit expansion and easing during credit contraction. Credit cycles can coincide with the business cycle as well.

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