Whether you have money to save or a loan to borrow, a sudden change in interest rates can wreak havoc on even the most carefully organized financial plans.
Want to buffer yourself from those sorts of market conditions? Well, while you can’t do much to alter interest rates, you can learn a little about how to predict a future change in rates.
This guide will explain what to look for to make those forecasts. We’ll outline who and what is behind changes in interest rates.
Available Funds from Lenders
As with any sort of product in the economy, savings and borrowing are subject to market conditions. The more products available, the less you’ll pay.
When it comes to interest rates, the numbers will shift based on supply and demand. When there is money to lend, but people aren’t readily borrowing, you have a high supply and cheaper rates on offer.
When supply is low and demand is high (maybe more borrowers in the market or more people deferring loan repayments), that rate of interest will rise.
Likewise, when more people begin to move their money into savings, there is an uptick in the supply of money in the market. That means more funds are available for banks to lend, and rates go down.
Inflation is the rate at which prices rise in the economy. If the price of a loaf of bread doubles in a short space of time, that’s known as high inflation (in fact, that example would be such a steep rise it is known as hyperinflation).
Consider a situation where there is a high level of inflation in an economy. Prices are rising steeply across many areas. Imagine you are a bank lending money to the general public in that situation.
When your customer repays that loan, that money is worth less than when you first lent it due to high inflation. So as a bank, what do you do to offset this? You raise interest rates on loans.
In other words, when inflation is on the rise, expect interest rates to begin to rise too.
Government and Central Banks
If you want to know what is happening with a change in interest rates, you’ll need to understand a bit about fiscal policy.
Fiscal policy is the term used to describe government actions to shape and direct the economy. For example, a government or central bank might introduce more money into the market, so there is more available to borrow.
How do governments introduce money into the economy? There are a few options. First, they can print more money. Second, governments can borrow money.
Borrowing more money is known as deficit financing. That is where governments decide to raise spending and spend more than they collect in taxes.
They borrow money to cover the rest of the spending. And when governments borrow, numbers are in the region of billions of dollars, which means less money available in the market for other borrowers.
Understanding Interest Rates
Once you grasp the main conditions that can cause a rise or fall in interest rates, you are in a much better position to manage your finances.
That knowledge will help you decide whether to save or borrow, depending on what is happening in the economy.
Check out the latest economic news now to help you with your next big financial decision.