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Interest Rates Why Do They Frequently Rise and FallA lot of intricate factors are responsible for the constant changes of the interest rate. Those whose skills are honed up in studying interest rates attest to the fact that it is a difficult task to predict future interest rates just as it is to forecast weather. Owing to the fact that human activity is being reflected in interest rates, forecasting on a long term basis is almost impracticable. Interest rate as you may have known already is what you pay for the money you borrow.
Interest rates go up and down, indicating a lot of factors. Crucial among these factors is funds supply provided for loans by lenders, as well as borrowers’ demand. Taking the mortgage market as an instance; in a given period when many consumers are borrowing money for house purchase. Banks and trust companies have a need of available funds to lend. This can be obtained from the deposit made with them by their customers. 6% interest is paid by the bank on 5-year GICs and they charge 8% interest on a 5-year mortgage. If demand for loan is higher relative to the available fund, they will have their rates increased or borrow funds from others by issuing bonds to institutions in the wholesale market. The problem with this fund source is its high cost which causes the interest rate to skyrocket.
On the other hand, if the lending institutions and trust companies (such as banks) have sufficient funds for lending and the housing market is not fast enough, a consumer borrowing for house financing will be given special rate discounts, there will be high competition among lenders making rates to be low. Inflation is yet another factor affecting interest rates. Increase in the growth of the economy also raises inflation while a slow economic growth decreases inflation. The interest rate is suitably changed by the Federal Reserve either to decrease inflation and reduce the growth in economy or to make it boom.
Economic growth is usually linked to higher inflation, owing to the fact that the demand for goods and services are high (making prices to go up). Interest rates and mortgage rates tend to move towards the same direction. But, real mortgage rates are also dependent on supply and demand for mortgages. The supply/demand equation for mortgage rates and interest rates may differ from each other. The outcome sometimes may be a different direction movement of the mortgage rates from other rates. As an instance, a sole lender may be compelled to close additional mortgages in order to meet a commitment made by them. The outcome will be lower rates grant regardless of the high interest rate!
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