It’s true that in our day and age, prediction is precious. There is a plethora of methods for predicting the future. For prediction, people use astrology, mathematics, and others too lengthy to mention. In this essay I will go over just one aspect of forecasting: Interest rates.
Interest rates have been an inexhaustible subject for business now that technology allows us to predict more and more with precision. Have you ever wondered why interest rates are so high these days? What’s their relation to inflation? Questions like this could be answered by taking what we already know about interest rate predictions and applying it to the real world.
Basic tips on how to predict interest rates
Tip 1: The interest rate rises when inflation is high!
Interest rates are expressed as a percentage. Therefore, when the inflation rate is high, interest rates are also high because they need to compensate for the purchasing power lost by inflation.
Tip 2: The interest rates fall if the inflation rate is stable!
When there’s no expected change in prices, there is no expected change in their purchasing power. Therefore, a central bank has more monetary policy leeway to lower the interest rate without having to worry about an increase in inflation. This leads to lower interest rates and probably more investment. The low-interest atmosphere also gives companies incentives to borrow money and expand their business by investing in order to outrun their competition.
Tip 3: The interest rates are extremely low if the inflation rate is very low.
If there’s a very low inflation rate, it is likely that interest rates will be extremely low because of compensating for the expected loss of purchasing power due to falling prices.
Secret tips on how to predict interest rates
Secret 1: It might look like predicting interest rates is a daunting task, but it’s fairly simple if you know all the factors. Among these are the central bank policies (how much new currency is created for economic activity), the current interest rates (monetary policy leeway), the expectations of inflation, and most importantly: The supply and demand of national bonds.
Secret 2: The supply of national bonds depends on who wants to buy them! The reason why national bonds are so important is that they earn interest paid by governments in terms of taxes. These taxes will be spent on social programs, public utilities, and welfare which maintain government control over their people. In return for these benefits and services, citizens reluctantly agree to pay taxes to their government.
Secret 3: Every year farmers are required to sign bonds into a bank, which represent the amount of food they will provide in the upcoming season. If the farmer feeds his stock too well or feeds it too little, he’ll be required to pay interest. Therefore, farmers will be less likely to produce too much food because there is an expectation that their food stocks will not be enough for them.
Concluding Paragraph
I hope this article has helped you to understand how much interest rates help our economy through monetary policy. Armed with this knowledge, you can now go out and predict what will happen to interest rates in the next decade.
I encourage you to use the information I have provided here to create something new and exciting. You’ll be surprised at how easy it is!
