A Brief Explanation of Why Interest Rates Go Up or Down

A simple guide to understanding why rates moveInterest rates are always changing in the economy today. With numerous aspects of the global finances depending on the interest rates that groups like the World Bank charge, it is easy to get confused and start thinking of rates as a mysterious force. Well, in this read, we are going to look at the primary causes of changes in interest rates.

Money Supply

There’s a limited supply of money on the globe, but at the same time, there’s an endless supply of money. If this sounds like a paradox, well in a way it is. Economic minds are at a constant battle with the money supply. When there is too much money circulating, then interest rates need to be high so that borrowing does not go out of hand. However, when there’s less supply of money, interest rates go down in order to encourage borrowing.

Investor Risk Tolerance

The investors in this world are human beings and as you may guess, we are not always rational beings. While what leads to bad and good economic times is still open for debate, what is really easy to tell is when investors fear losing money in the market. The fear of loss tends to affect the market which results in lower rates as bond purchasers are willing to settle for less. When the market seems to be great, investors want to make more money and so, people purchasing bonds are expected to get a higher interest rate.

Bond Market

When a country gives more debt in its government’s name, it needs to create more money in order to offset the debt. This leads to greater money supply and as discussed earlier, this results in higher interest rates. This is also contributed by the need to keep the borrowing rate reasonable.

When the bond market yearns for the bonds that the government gives, this results in an increase in money supply. On the contrary, when the bond market isn’t interested, the money supply usually decreases or stagnates, which pressures the interest rates to go down. Well, comprehending the bond market is not as easy as reading several charts and following a ticker, but with continued reading, it makes sense over time.

Savings Rates

People have particular tendencies like saving when they receive a significant amount of money and spending when they get it in small doses. However, the savings rate across a nation is not a static or fixed variable.

When the savings rate increase, borrowing isn’t that necessary for consumer spending and as a result, the interest rates go down. When the savings rates go down, borrowing becomes more necessary and as a result, the interest rates rise in order to compensate for this.

Talk to a Mortgage Broker today to discuss how to get the best interest rates for your needs.