Why interest rates change is reflected through economic growth, monetary policy and fiscal policy.The most important factor in determining why interest rates change is the supply of funds available from lenders and the demand from borrowers. The way governments spend their money and finance their endeavors is called Another major factor affecting why interest rates change is The trouble is, no one is quite sure how much money is necessary in an economy at any time and how it’s actually used once it’s available. Updated Nov 20, 2018. Interest is simply the cost of borrowing money. The boom and bust cycle describes capitalist economies that tend to contract after a period of expansion and then expand again. As with any good or service in a free market economy, price ultimately boils down to supply and demand. We have tailored-with-padding our articles to all levels of financial expertise. The lender will in turn consider the benefits of keeping his money for his own spending or putting it into an investment.Both the lender and borrower look at the interest payment on the loaned amount in percentage terms. The economic cycle is the ebb and flow of the economy between times of expansion and contraction. This causes endless debate among economists and other market watchers.Another key factor influencing why interest rates change is Investors want to preserve their “purchasing power,” so if inflation is high and risks going higher, they will need a higher interest rate to consider lending their money for more than the shortest of terms.After the very high inflation years of the 1970s and early 1980s, lenders demanded a very high interest rate to offset inflation levels and make their loan worthwhile. Why Do Interest Rates Change? Things like Federal Reserve meetings, a bump in the 10-year Treasury yield, MBS prices, home sales data, economic activity, and other related mortgage news may make rates rise from day to day. If a borrower wants to spend more than his actual cash on hand, he’ll need to find someone to lend him additional funds.
Demand falls and companies sell less. If consumers fear the value of their money will rapidly decline, they’ll demand a higher rate on their “loan” to the government. A central bank conducts a nation's monetary policy and oversees its money supply. Banks pay interest on money they borrow and charge interest on money they loan. When interest rates fall, the opposite happens. By borrowing from their depositors and lending to their mor… FACEBOOK TWITTER LINKEDIN By Daniel Kurt. Instead, exchange rates change much more frequently. At the same time, banks must remain competitive, which is why you'll see most money market interest rates within a … That need keeps the demand for capital at a high level and interest rates higher than they otherwise might be.Governments will also borrow if they spend more money than they raise in taxes to finance their programs through “deficit financing”. The economy shrinks. In a period when many people are borrowing money to buy houses, banks need to have funds available to lend. A $5 interest payment on a $100 loan that is outstanding for one year is called a 5% interest rate (5 divided by 100).The interest rate charged to a borrower reflects the level of risk that the particular borrower might default on the loan. These funds can come from their own depositors, since the banks pay 2% interest on five year GICs and charge 4% interest on a five-year mortgage. The rise and fall of interest rates is very difficult to predict. Expansionary policy is a macroeconomic policy that seeks to boost aggregate demand to stimulate economic growth. They include the strength of an economy which affects supply and demand for funds; fiscal policy; monetary policy; and the level and expectations for inflation.Interest rates change over time, reflecting both the demand from borrowers and the supply of funds available to be loaned by providers of capital.The best way to think of interest rates is as the “price of money”.