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Today I will be outlining the various factors that affect interest rates, and why interest rates are important to you. This Padlet starts with a some details on the basics of interest rates. As you continue along, it explains in depth some key factors that affect the rates, some important factors that aren't often considered, and then finally how they are relevant in our society today.

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1. This article makes a clear separation between the factors affecting interest rates that are in and out of your control. Some key factors that are in your control are your: credit score, loan amount, and your guarantee. The factors that you can not change on a micro level are supply & demand, inflation, and federal fund rates.

2. I chose to share this website because I didn't know what the federal fund rates were or how supply and demand affect the interest rates until finding this article, and I hope that one of these six factors affecting rates would be new to the reader(s) as well.

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If you've ever gotten a credit card or taken out a personal loan, you may have wondered how the issuer or lender decided on the amount of interest to charge you. Your credit history plays a big part, but it's not the whole picture. There are a variety of components, both things you can control and things you can't, that combine to determine your interest rate, and understanding how they work can help you secure your lowest interest rate possible. If you have an interest in interest, read on to learn more.

Factors out of your control

Interest rates are partly based on economic factors that shift over time. You may not have any sway over these, but once you know what to look for, you can watch for changes and take advantage of them.

Supply and demand: When you think of interest rates as a price for borrowing money, it makes sense that they would be affected by supply and demand. In lending, an increase in the demand for money, or a decrease in the supply of money held by lenders, will cause interest rates to go up. For example, if a lot of people started pulling all of their money out of their checking and savings accounts, that would decrease the supply of money that banks have to lend to borrowers, which would likely raise interest rates at those banks. Conversely, a decrease in the demand for money, or an increase in the supply of money, will lower interest rates as lenders try to attract more borrowers.

Inflation: Inflation is when the prices of goods and services rise, which decreases the purchasing power of money. Inflation can be good for people carrying debt, since it lowers the value of each dollar you owe, but by the same token it's terrible for lenders. If the money a lender receives has less value than the money it originally lent due to inflation, it's going to raise interest rates to account for the difference.

Federal funds rate: The interest rate that financial institutions charge one another for short-term loans is called the federal funds rate. It's determined by the U.S. Federal Reserve, which uses the federal funds rate as a lever to help balance the economy. When the economy is slow, the Federal Reserve can lower the federal funds rate to encourage more borrowing, and when the economy is growing too fast, which can trigger large increases in inflation, the Federal Reserve can raise the federal funds rate to discourage borrowing. The interest rates that these big financial institutions charge one another creates a baseline that influences the prime rate, or the interest rate that banks charge to their best customers who have the lowest possible risk of defaulting on their loans, which in turn affects the interest rates for everyone else. So, when the federal funds rate goes up, as it recently did, interest rates go up along with it.

Factors in your control

These are all parts of interest rates that you can choose or change, and when you get down to it, they all have one goal: minimizing the lender's risk. Lenders are looking for the safest loans possible, so by making yourself a less risky borrower, you can secure better interest rates.

Credit scores: Your credit scores impact many different parts of your life, but your ability to easily get new credit is probably the most obvious. Since credit scores are supposed to represent your creditworthiness, lenders look intensively at your credit scores and credit history to determine how risky you are to lend to. High credit scores, which you can get by paying your bills on time and keeping a low credit utilization ratio, indicate that you're good at paying off your debts, so the risk of lending to you is low. If your credit scores aren't great, though, the lender views you as less likely to pay back all of your loan, so it will charge you a higher interest rate to make up for that risk or just reject you outright. Fortunately, there are a number of ways you can boost your credit scores, and there are even services you can hire to fix your credit for you.

Loan amount and duration: While it may seem unfair that simply requesting a lot of money or a long repayment term can increase your interest rate, they both make a loan more difficult to pay back. Borrowing larger amounts of money means larger monthly loan payments, and taking out a loan with longer repayment terms not only makes the loan more vulnerable to inflation (note that this doesn't apply to a loan with a fixed rate), but it also increases the chance that you'll face some adversity in your life that may negatively impact your ability to pay the debt. To reduce these factors, before you take out a loan, ask yourself how much money you really need to borrow, and figure out the shortest possible amount of time in which you could realistically pay off the debt, even if it means making a few sacrifices.

Guarantee: A guarantee is an agreement to settle a debt in an alternate way in case the borrower defaults. Guarantees can take several different forms, such as collateral, cosigners or a personal guarantee, and adding a guarantee of some kind to a loan can reduce interest rates since they lower the lender's risk. Before you add a guarantee to a loan to reduce your interest rate, be sure you thoroughly read and understand the agreement you're making, as some of them can have unusual terms. Additionally, some types of loans have preexisting policies regarding guarantees, such as auto loans, which use the vehicle you're buying as collateral, so you won't always have a choice on whether or not to guarantee a loan.

Securing a low interest rate can turn a loan from a heavy burden into a breeze. To find out more ways to maximize your money, follow our personal finance blog.

About Author

Gabriel Wood

Gabriel Wood is a personal finance and technology writer for NextAdvisor.com, covering personal and small business loans, VoIP, and Internet fax services. He is a graduate of American University in Washington D.C., and currently lives in Oakland. Follow him on Twitter @GabrielAdvisor.

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6 Factors That Affect Your Interest Rate - NextAdvisor

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If you've ever gotten a credit card or taken out a personal loan, you may have wondered how the issuer or lender decided on the amount of interest to charge you. Your credit history plays a big part, but it's not the whole picture.

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1. The key point in this video is that bond prices are inversely related to interest rates! When interest rates increase, the expected percentage return on investments are generally higher. Therefore, if money can yield higher return elsewhere, then the value of previously issued bonds then decreases. Inversely, if interest rates were to drop, then the value of previously purchased bonds would then be greater.

2. I chose to share this video because I've found Khan academy to be a reliable source for economic teachings, and also because it's important for the reader(s) to understand the relationships between different economic signals, such as interest rates and bonds.

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Relationship between bond prices and interest rates (video) | Khan Academy

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1. The US government has recently cut interest rates to stimulate the American economy to help the economy throughout the COVID-19 pandemic. How does this help you ask? Simply put, the less money costs, the more spending and investing takes place.

All things equal, the public often saves their money and turns their assets into liquidity in times of crisis. The most recent cut in interest rates was made with the goal of counteracting this trend of saving, in order to maintain economic growth.

2. I chose to share this article because it's important to understand what impact the government can have on our economy, especially in times of crisis.

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Changes in interest rates can have both positive and negative effects on the U.S. markets. When the Federal Reserve Board (the Fed) changes the rate at which banks borrow money, this has a ripple effect across the entire economy. Below, we will examine how interest rates can have an effect on the economy as a whole, the stock and bond markets, inflation and recessions.

With every loan, there is a possibility that the borrower will not repay the money. To compensate lenders for that risk, there must be a reward: interest. Interest is the amount of money that lenders earn when they make a loan that the borrower repays, and the interest rate is the percentage of the loan amount that the lender charges to lend money.

The existence of interest allows borrowers to spend money immediately, instead of waiting to save the money to make a purchase. The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars. When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy. Businesses and farmers also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing. This creates a situation where output and productivity increase.

Conversely, higher interest rates mean that consumers don't have as much disposable income and must cut back on spending. When higher interest rates are coupled with increased lending standards, banks make fewer loans. This affects not only consumers but also businesses and farmers, who cut back on spending for new equipment, thus slowing productivity or reducing the number of employees. The tighter lending standards also mean that consumers will cut back on spending, and this will affect many businesses' bottom lines.

Whenever interest rates are rising or falling, you commonly hear about the federal funds rate. This is the rate that banks use to lend each other money. It can change daily, and because this rate's movement affects all other loan rates, it is used as an indicator to show whether interest rates are rising or falling.

These changes can affect both inflation and recessions. Inflation refers to the rise in the price of goods and services over time. It is the result of a strong and healthy economy. However, if inflation is left unchecked, it can lead to a significant loss of purchasing power.

To help keep inflation manageable, the Fed watches inflation indicators such as the Consumer Price Index (CPI) and the Producer Price Index (PPI). When these indicators start to rise more than 2-3% a year, the Fed will raise the federal funds rate to keep the rising prices under control. Because higher interest rates mean higher borrowing costs, people will eventually start spending less. The demand for goods and services will then drop, which will cause inflation to fall.

A good example of this occurred between 1981 and 1982. Inflation was at 14% a year, and the Fed raised interest rates to 20%. This caused a severe recession, but it did put an end to the spiraling inflation that the country was seeing. Conversely, falling interest rates can cause recessions to end. When the Fed lowers the federal funds rate, borrowing money becomes cheaper; this entices people to start spending again.

A good example of this occurred from 2001 to 2002, when the Fed cut the federal funds rate to 1.25%. This greatly contributed to the economy's 2003 recovery. By raising and lowering the federal funds rate, the Fed can prevent runaway inflation and lessen the severity of recessions.

Investors have a wide variety of investment options. When comparing the average dividend yield on a blue-chip stock to the interest rate on a certificate of deposit (CD) or the yield on a U.S. Treasury bond (T-bonds), investors will often choose the option that provides the highest rate of return. The current federal funds rate tends to determine how investors will invest their money, as the returns on both CDs and T-bonds are affected by this rate.

Rising or falling interest rates also affect consumer and business psychology. When interest rates are rising, both businesses and consumers will cut back on spending. This will cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise.

Interest rates also affect bond prices. There is an inverse relationship between bond prices and interest rates, meaning that as interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. The longer the maturity of the bond, the more it will fluctuate in relation to interest rates.

One way that governments and businesses raise money is through the sale of bonds. As interest rates move up, the cost of borrowing becomes more expensive. This means that demand for lower-yield bonds will drop, causing their price to drop. As interest rates fall, it becomes easier to borrow money, and many companies will issue new bonds to finance expansion. This will cause the demand for higher-yielding bonds to increase, forcing bond prices higher. Issuers of callable bonds may choose to refinance by calling their existing bonds so they can lock in a lower interest rate.

Interest rates affect the economy by influencing stock and bond interest rates, consumer and business spending, inflation, and recessions. However, it is important to understand that there is generally a 12-month lag in the economy, meaning that it will take at least 12 months for the effects of any increase or decrease in interest rates to be felt. By adjusting the federal funds rate, the Fed helps keep the economy in balance over the long term. Understanding the relationship between interest rates and the U.S. economy will allow us to understand the big picture and make better investment decisions.

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How Interest Rates Affect the U.S. Markets

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Changes in interest rates can have both positive and negative effects on the U.S. markets. When the Federal Reserve Board (the Fed) changes the rate at which banks borrow money, this has a ripple effect across the entire economy.

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1. Don't forget about inflation! This video explains what a real interest rate is, and how it is calculated.

A real interest rate is the interest rate that a lender will
earn after taking inflation into account. For example, if a lender charges 6% on a loan, but the inflation level expected over the length of the loan is 2%, then the real interest rate, or the interest that the lender will earn is 4%.
If you were to express this as a formula, it would be that real interest = nominal interest (the rate in which you chose to charge) - the inflation rate.

2. I chose to share this concept because it applies to everyone who has a bank account. Keep in mind that when you put money in your bank, you’re truly lending that money to the bank. The bank often pays you a lower percentage for holding your money with them than the rate of inflation, so your money is losing value by sitting in any bank account that offers returns lower than the rate of inflation.

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What is a Real Interest Rate?

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. The real interest rate reflects the rate of time-preference for current goods over future goods. The real interest rate of an investment is calculated as the difference between the nominal interest rate and the inflation rate:

Real Interest Rate = Nominal Interest Rate - Inflation (Expected or Actual)

Key Takeaways

Understanding Real Interest Rate

While the nominal interest rate is the interest rate actually paid on a loan or investment, the real interest rate is a reflection of the change in purchasing power derived from an investment or given up by the borrower. The nominal interest rate is generally the one advertised by the institution backing the loan or investment. Adjusting the nominal interest rate to compensate for the effects of inflation helps to identify the shift in purchasing power of a given level of capital over time.

According to the time-preference theory of interest, the real interest rate reflects the degree to which an individual prefers current goods over future goods. A borrower who is eager to enjoy the present use of funds shows a stronger time-preference for current goods over future goods and is willing to pay a higher interest rate for loaned funds. Similarly a lender who strongly prefers to put off consumption to the future shows a lower time-preference and will be willing to loan funds at a lower rate. Adjusting for inflation can help reveal the rate of time-preference among market participants.

Expected Rate of Inflation

The anticipated rate of inflation is reported by the U.S. Federal Reserve to Congress on a regular basis and includes estimates for a minimum three-year period. Most anticipatory interest rates are reported as ranges instead of single point estimates. As the true rate of inflation may not be known until the time period corresponding with the holding time of the investment has passed, the associated real interest rates must be considered predictive, or anticipatory, in nature, when the rates apply to time periods that have yet to pass.

Effect of Inflation Rates on the Purchasing Power of Investment Gains

In cases where inflation is positive, the real interest rate is lower than the advertised nominal interest rate.

For example, if funds used to purchase a certificate of deposit (CD) are set to earn 4% in interest per year and the rate of inflation for the same time period is 3% per year, the real interest rate received on the investment is 4% - 3% = 1%. The real value of the funds deposited in the CD will only increase by 1% per year, when purchasing power is taken into consideration.

If those funds were instead placed in a savings account with an interest rate of 1%, and the rate of inflation remained at 3%, the real value, or purchasing power, of the funds in savings will have actually decreased, as the real interest rate would be -2%, after accounting for inflation.

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A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. The real interest rate reflects the rate of time-preference for current goods over future goods.

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1. An interest rate is the percentage amount charged to a borrower, or inversely earned by a lender. Interest is normally calculated based on the remaining value of the loan, and is often expressed as an annual rate. An example of a student earning interest would be when you hold your money in the bank, which is effectively a loan to the bank, the bank then pays you in interest for holding their money with them. On the contrary, if you were to take a small business loan, or if you were to take OSAP, the interest would be the amount you pay on top of the principal amount.

2. I found this image to be good place to start for reader(s) to understand how fractional reserve banking works.

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1. This article provides an overview of some key factors that affect interest rates, similar to the article above. However, this article provides insight into factors that I didn't know about before.

This article outlines how fiscal deficit often raises interest rates. The severity of fiscal deficit often causes governments to borrow money. The increase of government money increases the supply of money, and if you've taken a macroeconomics class, you know that price and supply have a direct relationship. So, when governments are running at a deficit, this can cause interest rates to rise.

2. I chose to share this article because I had no idea that there was a relationship between fiscal expenditure and interest rates.

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Reserve Bank of India has cut the repo rate by 25 basis points in the maiden monetary policy review of the calendar year 2019. It indicates interest rates in the economy are on their way down. Besides the repo rate, following are a few factors that influence the interest rates in the economy. Here are they:

Demand for money: Typically, in a growing economy, money is in demand. Manufacturing sector companies and industries need to borrow money for their short-term and long-term needs to invest in production activities. Citizens need money as they need to borrow for their homes, buy new cars, and other needs. But when an economy isn't doing that well, companies avoid borrowing if the demand for their products is low.

A very high inventory is detrimental, so they produce less. In effect, they borrow less, ergo less demand for money. Consumers also spend less as a bad economy could result in job loss. Other things remaining the same, higher the demand for money higher the interest rates.

Supply of money: Like any other commodity, if the supply of money increases, other things remaining the same the price of money-interest rates, go down.

There are situations wherein the investors do not have attractive avenues and they chase the bonds or deposits. If there is no demand for that money at that moment, then the interest rates go down.

In recessionary times the interest rates tend to go down. A case in point is the sudden dip that took place in bond yields for a short period of time after the announcement of demonetisation.

As the general public deposited the demonetised currency notes into bank accounts, banks were flooded with money. The banks could not lend all that money so they choose to invest in government securities and that led to a fall in yields on bonds. Please note that fall in bond yields was temporary.

Fiscal deficit and government borrowing: Fiscal deficit is a result of government expenditure exceeding government revenue. To fund this deficit, the government resorts to borrowing. Being the largest borrower in the economy, the quantum of government borrowing influences the demand for money and in turn sways interest rates.

Higher the fiscal deficit, higher the government borrowing, higher the interest rates. Generally, bond markets respond to higher fiscal deficits by an uptick in bond yields.

Inflation: Prices of all goods and commodities are set by taking into account the general price increase in the economy-inflation. Interest rates, which the price of money, are no exception to this rule.

Savers need to be compensated by way of higher interest rates for sacrificing their current consumption motives in a high inflationary scenario. Investors will forgo their current consumption and invest in fixed income investments if they get positive real rate of return.

The real rate of return is arrived at by deducting inflation number from the nominal rate of return offered on the bonds and deposits. The ideas to keep the real rate of return positive so that after inflation the saver saves something. That means in high inflation era, the interest rates tend to stay up and vice versa.

Global interest rates and foreign exchange rates: Integration of Indian economy with the global economy has risen compared to what it was prior to acceptance of globalisation in 1991. That means the interest rates in the economy must be set in line with global trends in interest rates.

If India wants to attract global capital then the interest rates in India need to go up if the interest rates are going up globally. There are occasions such as the Lehman Crisis in 2008 when the central bankers across the globe choose to cut interest rates to pull the global economy out of recession.

Attractive interest rates bring in capital and support the foreign exchange rate. Tweaks in the interest rates in the economy can be used by a central bank for influencing the exchange rate. A central bank may choose to up the policy rates (repo rate in India) to indicate higher interest rates in the economy and thereby attract capital from overseas investors.

Central bank: Reserve Bank of India chooses to focus on various objectives while preparing its monetary policy. In a boom phase, the central bank may focus to contain inflation and hence may choose to hike interest rates. That curtails the consumption and investments driven by borrowed money. In a recessionary period, the central bank may want to induce growth by incentivising consumption and investments by reducing the interest rates. Central bank's monetary policy objectives thus influence the interest rates.

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Explainer: Six Factors That Influence Interest Rates In An Economy

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Reserve Bank of India has cut the repo rate by 25 basis points in the maiden monetary policy review of the calendar year 2019. It indicates interest rates in the economy are on their way down. Besides the repo rate, following are a few factors that influence the interest rates in the economy.

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1. This article explains the relationship between interest rates and the value of that currency. However, the article does note that there are many more factors on exchange rates and that interest rates are just a small 'piece of the puzzle'.

Higher interest rates attract foreign investment. Foreign investment can increase the value of a currency. When the value of a currency increases, compared to the value of other popular currencies, the exchange rate for that current increases.

2. I chose to share this article because exchange rates are extremely important to Canadians, due to our close relationship with the American dollar. The value of our dollar is extremely important for us because most countries trade against the USD, so the value of our currency can make it difficult or easy to import products depending on the value of our dollar.

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All other factors being equal, higher interest rates in a country increase the value of that country's currency relative to nations offering lower interest rates. However, such simple straight-line calculations rarely exist in foreign exchange.

Although interest rates can be a major factor influencing currency value and exchange rates, the final determination of a currency's exchange rate with other currencies is the result of a number of interrelated elements that reflect the overall financial condition of a country with respect to other nations.

Key Takeaways

Factors in Currency Values

Generally, higher interest rates increase the value of a country's currency. Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country's currency.﻿﻿

Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency's relative value.

This simple occurrence is complicated by a host of other factors that impact currency value and exchange rates. One of the primary complicating factors is the relationship that exists between higher interest rates and inflation. If a country can achieve a successful balance of increased interest rates without an accompanying increase in inflation, its currency's value and exchange rate are more likely to rise.

Interest rates alone do not determine the value of a currency. Two other factors-political and economic stability and the demand for a country's goods and services-are often of greater importance. Factors such as a country's balance of trade between imports and exports can be a crucial factor in determining currency value. That is because greater demand for a country's products means greater demand for the country's currency as well.

Favorable numbers, such as the gross domestic product (GDP) and balance of trade are also key figures that analysts and investors consider in assessing a given currency.

Another important factor is a country's level of debt. High levels of debt, while manageable for shorter time periods, eventually lead to higher inflation rates and may ultimately trigger an official devaluation of a country's currency.

Politics, Economics, and Currency Valuation

The recent history of the U.S. clearly illustrates the critical importance of a country's overall perceived political and economic stability in relation to its currency valuations. As the U.S. government and consumer debt rise, the Federal Reserve movers to maintain interest rates near zero in an attempt to stimulate the U.S. economy. When the economy recovers and grows, the Fed responds by incrementally raising interest rates.

Even with historically low-interest rates, the U.S. dollar still enjoys favorable exchange rates in relation to the currencies of most other nations. This is partially due to the fact that the U.S. retains, at least to some extent, the position of being the reserve currency for much of the world.

Also, the U.S. dollar is still perceived as a safe haven in an economically uncertain world. This factor-even more so than interest rates, inflation, or other considerations-has proven to be significant for maintaining the relative value of the U.S. dollar.

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How Do National Interest Rates Affect Currency Values and Exchange Rates?

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All other factors being equal, higher interest rates in a country increase the value of that country's currency relative to nations offering lower interest rates. However, such simple straight-line calculations rarely exist in foreign exchange.

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Bank of Canada & Federal Reserve (Video)

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Bank of Canada & Federal Reserve (Video)

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1. The B.O.C. and the Federal Reserve cut interest rates by half a percent at the beginning of March.

I found it very interesting that one of the speakers in the video mentioned that Canada was wise to lower the interest rates not only to stimulate the economy, but to keep the rates parallel with those of the US. I imagine that a large separation in interest rates between our countries can cause investors to move their money in or out of Canada, depending on how our rates compare to those across the border.

2. I decided to share this video because it is current news and because it also is predicting that there may be an interest rate cut again, which may be useful information to any of the reader(s) looking to potentially invest.

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The Bank of Canada followed the U.S. Federal Reserve today and cut its key interest rate by half a percentage point. The bank, whose first cut in four years brings the rate to 1.25 per cent, also made it clear that further cuts were possible if needed to fight the threat of the coronavirus to Canada's economy.
Here's what the economists are saying: CIBC chief economist Avery Shenfeld
"The Bank of Canada didn't wait to see the patient ailing before delivering a dose of preventative medicine, but where it goes from here is a matter of epidemiology rather than economics. The 50 bp move matched our expectations (which ramped up from 25 after the Fed took that step), with the U.S. move making this cut look less panicky. But the Bank wisely concluded that whatever outlook they previously had for Canada had deteriorated meaningfully given the global slowing, the hit to commodity prices, and the inevitable hit to confidence domestically. A reasonable first step, with the Bank signalling that if things get worse, they are prepared to do more. Like the rest of us, they will be watching for news on both the virus and the economy, but it's reasonable to assume a further 25 bp cut in April, with the rest of this year's story being dependent on which virus scenario plays out. Bonds had a bit of room to rally as the full 50 bps wasn't entirely priced in."
Capital Economics seniors Canada economist Stephen Brown
"Given the likelihood that the number of COVID-19 cases will rise rapidly in Canada in the coming weeks and that the incoming economic data, both domestically and internationally, will deteriorate, we expect the Bank to follow today's cut with another 25 bp reduction at the next meeting in April, when it updates its economic forecasts. Nevertheless, the Bank's concerns about the effects of substantially looser policy on the housing market mean that, at this stage, we are not convinced the Bank will cut its policy rate below 1%, as markets are currently pricing in."
BMO chief economist Douglas Porter
"The Bank left the door swinging wide open to further cuts, if need be. The reality is, it all depends on how the virus develops, and how consumers and, yes, financial markets then respond to that news. We suspect that given the heightened sensitivity to any bad news on that front, today's move is unlikely to be the last cut. One scenario could see the Bank trim rates by 25 bps in each of its next two decisions (in April and then early June).

A wrinkle in the Bank's rate outlook is that Governor Poloz will be leaving the Bank just prior to the rate decision in June. Curiously, one more 25 bp cut to 1.0% would leave rates exactly where he found them when he first took the job in June 2013. There's a certain symmetry to that."
RBC senior economist Nathan Janzen
"A lot of it was priced in at this point. The Fed moved yesterday by 50 basis points. It's not as much of a surprise that the Bank of Canada went ahead and put in a 50 basis-point cut today. Like the Fed suggested yesterday, now the Bank of Canada will be in wait-and-see mode. They've added some monetary policy stimulus. It's really preemptive because we've not seen weakness in the data. They're more worried it's going to show up at the end of the first quarter or in the second."
"The coronavirus looks like it could have a significant impact on growth in near term. Rates are already low to begin with. When rates are low an ounce of prevention is a pound of cure. Part of it is a message that central banks stand ready to step in and help growth, but there is also genuine concern that it will hurt growth and they want to lean against that."
"Certainly there will be calls for fiscal stimulus or some kind of fiscal response to add to the monetary policy response, and we do have the federal budget coming up, and we would expect to see something there in response to the virus."
TD Securities strategist Andrew Kelvin
"Markets were I think reasonably well positioned for this. With the Fed cutting by 50 yesterday it really did paint the bank into a corner."
"I thought what was interesting about it was the amount of time the bank spent discussing how the outlook had weakened excluding the impact of the coronavirus, talking about things like weather and the teachers strike ... They really are taking a broadly negative view of the economy, this is not something that is limited to the coronavirus."
"I think the base case needs to be at least 25 basis points in April."
Derek Holt, vice president of Capital Markets Economics, Scotiabank
"I think they did the right thing ... They retained a rather doveish sounding bias, reading the relatively short statement it's tough to get any upside out of this. They're standing ready to adjust again in April, in my opinion."
"To be cutting 50 and saying that they stand ready to adjust monetary policy further that's a clear cue that they're not done."
With files from Reuters

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Bank of Canada will likely cut another quarter point in April, economists say

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The Bank of Canada followed the U.S. Federal Reserve today and cut its key interest rate by half a percentage point. The bank, whose first cut in four years brings the rate to 1.25 per cent, also made it clear that further cuts were possible if needed to fight the threat of the coronavirus to Canada's economy.

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Trudeau asks lenders to lower interest Rates!  (Image) 

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Trudeau asks lenders to lower interest Rates!  (Image) 

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1. This graphic shows some key details on the amount of credit card debt the average Canadian is in. I chose to share this image because this morning (03/26/2020) P.M. Trudeau asked banks and credit card companies to lower interest rates in order to help our economy in this difficult time.

2. Some of these numbers were shocking to me, they're much higher than I expected, and although not all of us are experiencing these levels of debt, it's important to understand how the average citizen being this in debt affects our overall economy.

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Did you know that the average Canadian has credit card debt of nearly $3,800 and owes $1.68 for every $1 they earn in disposable income? If you're in this situation, it can often be hard to see the light at the end of the tunnel. In fact, research has shown that 1 in 20 are worried that they will never be debt-free.

Saving for a big expense like a vacation or a home can seem like a daunting task, especially for the 50% of Canadians with credit card balances who say they often don't pay their monthly statement in full. These goals can seem like an impossible dream for those trying to pay off high-interest credit card debt.

However, it's possible to work towards a debt-free future. Try using one of these strategies:

1. Consolidate your debt
Carrying debt on a number of different credit cards can be hard to manage. In this situation, it's worth thinking about consolidating this debt. Getting a personal loan or line of credit with your bank or a peer-to-peer lending company - such as Grow - can be a good option, as can a balance transfer credit card.

Balance transfer cards are specifically designed to offer competitive rates in order to attract new customers. The MBNA Platinum Plus MasterCard is a good example. It offers a 0% interest rate on balance transfers for 12 months. It's important to be aware of the specific terms and conditions of cards like this as the low rates are generally only applicable for a promotional period. But if used carefully, balance transfer cards can be a very effective tool in reducing debt.

The best thing about consolidating debt is that you can minimize or even remove interest charges, albeit often only for a limited amount of time. This means that more of your monthly payments go toward clearing your balance rather than just covering interest charges.

2. Use the debt snowball method
Seeing results quickly can be a great motivator to continue working hard to reduce credit card debt so this technique can work really well. With the debt snowball method, you aim to pay off your smallest debts first and then move towards the larger ones. By making minimum payments on your other debts, you can focus on making the largest payments on your smallest debt to clear it as quickly as possible. Once you've paid off that creditor, move onto the next smallest debt and repeat until you're debt free.

This method starts to show results faster than other strategies. Choosing to pay off smaller balances first reduces the number of creditors you have much more quickly. And it can help keep up a positive momentum. However, do keep in mind that the interest charges on your larger debts will continue to accumulate. If they have particularly high-interest rates, you may want to consider the next option.

3. Start a debt avalanche
This strategy is effective in reducing interest charges by prioritizing paying debts with the highest interest rates first. To do this, make the largest payments on the debt with the highest rate of interest while only paying the minimum required on your other debts. Once you've cleared the highest interest debt, move to the next highest until you've paid off all of your balances.

This method is best suited for those who are really committed to paying off their debt. But it may take time to feel you're making progress if you carry a large balance on a high-interest credit card. However, it's particularly efficient in the long term as you'll end up paying less interest overall.

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3 Ways to Pay Off High-Interest Credit Card Debt | slice.ca

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Did you know that the average Canadian has credit card debt of nearly $3,800 and owes $1.68 for every $1 they earn in disposable income? If you're in this situation, it can often be hard to see the light at the end of the tunnel.

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1. This video outlines visually the main relationships interest rates share with other economical factors. Some of the key factors Investopia explains are the demand for credit, inflation, the federal funds rate, and buying or selling securities.

2. I chose to share this video because I found it very useful, as I'm a visual learner. I'm hoping that the reader(s) find this video effective in building a foundational understanding of the main factors affecting interest rates.

The most valuable piece of information I took from this video is how they visually represent that money flow when the securities are either purchased or sold.

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend. But prevailing interest rates are always changing, and different types of loans offer different interest rates. If you are a lender, a borrower, or both, it's important you understand the reasons for these changes and differences.​ They also have a heavy effect on the rare metals trade, including silver stocks.

Key Takeaways

Lenders and Borrowers

The money lender takes a risk that the borrower may not pay back the loan. Thus, interest provides a certain compensation for bearing risk. Coupled with the risk of default is the risk of inflation. When you lend money now, the prices of goods and services may go up by the time you are paid back, so your money's original purchasing power would decrease. Thus, interest protects against future rises in inflation. A lender such as a bank uses the interest to process account costs as well.

Borrowers pay interest because they must pay a price for gaining the ability to spend now, instead of having to wait years to save up enough money. For example, a person or family may take out a mortgage for a house for which they cannot presently pay in full, but the loan allows them to become homeowners now instead of far into the future.

Businesses also borrow for future profit. They may borrow now to buy equipment so they can begin earning those revenues today. Banks borrow to increase their activities, whether lending or investing and pay interest to clients for this service.

Interest can thus be considered a cost for one entity and income for another. It can represent the lost opportunity or opportunity cost of keeping your money as cash under your mattress as opposed to lending it. And if you borrow money, the interest you have to pay could be less than the cost of forgoing the opportunity of having access to the money in the present.

How Interest Rates are Determined

Supply and Demand

Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them.

An increase in the amount of money made available to borrowers increases the supply of credit. For example, when you open a bank account, you are lending money to the bank. Depending on the kind of account you open (a certificate of deposit will render a higher interest rate than a checking account, with which you can access the funds at any time), the bank can use that money for its business and investment activities. In other words, the bank can lend out that money to other customers. The more banks can lend, the more credit is available to the economy. And as the supply of credit increases, the price of borrowing (interest) decreases.

Credit available to the economy decreases as lenders decide to defer the repayment of their loans. For instance, when you choose to postpone paying this month's credit card bill until next month or even later, you are not only increasing the amount of interest you will have to pay but also decreasing the amount of credit available in the market. This, in turn, will increase the interest rates in the economy.

Inflation will also affect interest rate levels. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future.

Government

The government has a say in how interest rates are affected. The U.S. Federal Reserve (the Fed) often makes announcements about how monetary policy will affect interest rates.

The federal funds rate, or the rate that institutions charge each other for extremely short-term loans, affects the interest rate that banks set on the money they lend. That rate then eventually trickles down into other short-term lending rates. The Fed influences these rates with "open market transactions," which is the buying or selling of previously issued U.S. securities. When the government buys more securities, banks are injected with more money than they can use for lending, and the interest rates decrease. When the government sells securities, money from the banks is drained for the transaction, rendering fewer funds at the banks' disposal for lending, forcing a rise in interest rates.﻿﻿

Types of Loans

Of the factors detailed above, supply and demand are, as we implied earlier, the primary forces behind interest rate levels. The interest rate for each different type of loan, however, depends on the credit risk, time, tax considerations (particularly in the U.S.), and convertibility of the particular loan.

Risk refers to the likelihood of the loan being repaid. A greater chance that the loan will not be repaid leads to higher interest rate levels. If, however, the loan is "secured," meaning there is some sort of collateral that the lender will acquire in case the loan is not paid back (i.e., such as a car or a house), the rate of interest will probably be lower. This is because the risk factor is accounted for by the collateral.

For government-issued debt securities, there is, of course, minimal risk because the borrower is the government. For this reason, and because the interest is tax-free, the rate on treasury securities tends to be relatively low.

Time is also a factor of risk. Long-term loans have a greater chance of not being repaid because there is more time for the adversity that leads to default. Also, the face value of a long-term loan, compared to that of a short-term loan, is more vulnerable to the effects of inflation. Therefore, the longer the borrower has to repay the loan, the more interest the lender should receive.

Finally, some loans that can be converted back into money quickly will have little if any loss on the principal loaned out. These loans usually carry relatively lower interest rates.

The Bottom Line

As interest rates are a significant factor of the income you can earn by lending money, of bond pricing and of the amount you will have to pay to borrow money, it is important that you understand how prevailing interest rates change: primarily by the forces of supply and demand, which are also affected by inflation and monetary policy. Of course, when you are deciding whether to invest in a debt security, it is important to understand how its characteristics determine what kind of interest rate you can receive.

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What Are the Forces Behind Interest Rates and What Causes Them to Rise?

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend.

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The most surprising thing that I learned in my research is how many factors there are that affect interest rates. I thought I was going to find a short list of factors. However, I quickly learned that interest rates can be swayed by a lot of different societal circumstances.

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The main example of relevancy I can think of is that interest rates affect the currency exchange. I spend a lot of money in USD, so tracking the value of the Canadian dollar is very important for me, so it's important for me to understand how interest rates can change the value of our dollar.

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If I were to pass on some knowledge to a family member or friend, it would be that a micro change to our interest rate can affect our economy at a micro scale, which is important to pay attention to as it might effect investment decisions they may make.