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Keeping an eye on the interest rate

Keeping an eye on the interest rate

The interest rate is a very important component in the world of finance. Trading markets depend on the change of the interest rate across the world. Many important factors influence the interest rate and following that the interest rate affects many other things along the line. I will try to explain the importance of the interest rate across the financing world.

Many factors influence the interest rate, and the following factors have the strongest influence over it:

– When the consumption of the goods is high, that prompts the increase of the rate of the interest.

– People in the world of finance expect the change of the interest rate due to expectations of the inflation change. Inflation is nothing but a change that makes the goods cost more in the future or the same amount of money being able to purchase fewer goods sometimes down the line.

– Every time a lender lends the money he runs a risk of a borrower who won’t be able to pay it back. And thus the lender has to charge a risk premium which has a slight impact on the interest rate.

– Some types of gain from the interest rate are connected to the taxes and therefore the lenders may try to keep the interest rate high to increase their profit.

– The status of the economy has a great impact on the situation of the interest rate. These two are closely connected. If the economy is strong, the rate is stable as well and vice versa.

– Banks have the big impact on the prices as they can lower or increase them whenever it is necessary. If the economy is too strong, it can damage the country and it is up to the bank to raise the rate. Economic growth can’t be achieved with high-interest rates, so when a country needs it, the bank will lower the price.

– The economy can get a short-run boost with the small lowering of the rates, but this isn’t usually done because the benefits are offset by inflation in short time. In the long run, this type of boost damages the economy. This is still done by many countries due to political reasons. These short-term economy expands more than usually happen just before the election and in a lot of cases; they are the leverage that wins them.

– The state of the economy is reflected in the employment and unemployment. Higher the employment rate the better the economy is. And as I already mentioned, strong economy equals high-interest rate.

Every market that is connected to interest rates has some rules and limitations that protect the biggest investors. Every market has a different level of risk that corresponds to the volume of the impact it has from the changes in the interest rates. The investments and the markets that have increased risks have bigger expectations from the return. On the other hand, the government bonds and similar trading assets that have a low level of risk generate less return.

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