Interest rate is the amount charged by lenders or loan providers against the borrowed money of consumers/borrowers. As a consumer, you probably are always monitoring it. When rates are low, it can be ideal to apply for and obtain loans. It is the time when borrowing will not be that expensive.
Interest rates usually go up, especially these days when global economies and finances turn volatile. But at times, governments and central banks also cut such rates. Here are seven factors that usually lead to reduced or lowered borrowing rates.
1. General economic conditions
The overall condition of the country’s economy can be a factor to be considered for a possible interest rate cut. A strong economy may lead to low interest rates especially when demand for loans is not too intense and there is an abundance of funds available to borrowers across the market. Good economy may also mean consumers are not generally in need to borrow funds just to make ends meet.
2. Supply and demand
Supply of funds as well as demand for those affects movements of interest rates. If lenders across the market have greater cash on hand amid a slow demand for money through loans from borrowers, competition among such banks will intensify. It can lead to reduction or decline in interest rates.
3. Monetary policy
The monetary policy of the government may lead to interest rate cuts. If the central bank has printed more notes or money, supply may possibly exceed demand. Oversupply of available funds available to borrowers and lenders alike might prompt a cut in current interest rates, which is set by the country’s central bank.
It is just logical for investors to preserve their money’s purchasing power. High inflation leads to higher interest rates. On the contrary, deflation is a significant factor for interest rate cuts. When there is deflation, or if inflation is low, investors do not need high interest rates to lend money. However, some lenders usually tend to be reluctant in lending money when there is deflation. They often wait until inflation picks up again to command higher interest for lending.
5. International forces
If foreign investors get more willing to lend cash to a country, they end up supplementing domestic funds to that marketplace. Consequently, interest rates will be driven down. On the contrary, if those foreign investors reduce their investments or pull out to reinvest elsewhere, there will be pressure to fill the gap on domestic sources, which can push the rates upward.
6. The US dollar
The US dollar remains as the main currency used in international trade. It is currently used extensively across world markets. Exchange rate movements, especially between a country’s currency and the US dollar, can be a basis for interest rate cuts. This may also depend on how demand for the dollar is at that market.
7. Political issues
It is a common knowledge that politics affects a country’s financial stability. Turbulent political system may lead to higher interest rates especially when foreign investors are shunned away, productivity is depleted, and inflation is driven up. Lack of drastic political problems and issues may indicate stability and possibly lead to interest rate reductions.