Reasons Why Interest Rates Fluctuate
June 27, 2019
Interest rates are always a changing part of today’s economy. With so many parts of the world’s economy dependent on the interest rates that groups like the World Bank and the Fed charge, it can be easy to get mixed up and start to think of interest rates as a magical, mysterious force. To understand how the economy works, it is essential that you first understand how interest rates work. In this article, we will be looking at some of the main reasons why interest rates fluctuate and how they affect everything from credit cards to bad credit home loans.
The amount of money circulating in the world is both limited and endless. Sounds complicated, right? Well, it is. So much so that the world’s top economic minds today are constantly grappling to find ways to manage how money circulates. When there is too much of it flowing, it is essential that interest rates are high to cap borrowing, so it does not spiral out of control. However, when supply is limited, lower interest rates can be used to stimulate borrowing.
We, as humans, have tendencies like saving money when we receive substantial amounts of it and spending when we receive it in smaller doses. However, it is worth noting that savings rates across different regions are generally not a static or fixed variable. For instance, when saving rates shoot up, borrowing often isn’t essential for consumer spending. As a result, interest rates tend to shoot down to compensate for this. However, when the rates drop, borrowing tends to become an essential part of the consumption process, which leads to interest rates being raised to keep things in check.
Bond markets are the law of any nation when it comes to debt. When a country issues debt in the name of the government, it often has to look for ways to make more money to offset it. This, in turn, expands the supply of money, which then leads to interest rates shooting up as a matter of economic policy and as a way to keep the rate of borrowing rational. When the market is hungry for the bonds a government is issuing, this often causes money supply to increase. However, when the market isn’t interested, money supply will often either decrease or stagnate, something that could cause interest rates to fall. While understanding how the bonds market works isn’t as simple as reading a few charts and following a ticker, with patience and continued studying, it will start to make sense in time.
Investor Risk Tolerance
Investors can sometimes be irrational. While the concept of what leads to “bad” and “good” economic times is still open for debate, the easiest thing to tell is when investors aren’t ready to lose what they have invested in the paper asset markets. The fear of losing what they have invested in is what typically drives the bond market, which often leads to interest rates dropping since bond buyers are more willing to settle for less than they would under normal circumstances. When times are good, investors tend to be more concerned about how they are going to make more money; people buying bonds expect to receive better interests.
Translating This Knowledge to Your Business
Now that you, as a business owner, understand interest rates better, knowing where and when to borrow should become more straightforward for you — looking for funds to renovate your current property or to purchase an investment property or to fund business expansion? Wait until saving rates are high since loan rates will be at their lowest. If you study the historical trends on both interest rates and savings rates, you will notice that there’s a pattern that they often follow at different times of the year.
So, consider planning your next significant investment around times when your business can get historically low rates, and you will be glad that you did your research. Yes, interest rates are complicated, but once you understand what drives them, they are quite easy to understand.