How To Understand How Interest Rates Behave
by Carlota R. Schneider
Of all the decisions you try to make correctly when you are deciding on a home loan, timing the interest rate may be one of the biggest. Will interest rates increase, in which case you should lock in a fixed rate home loan for as long as you can, or are they headed down, which means you should either wait to buy or refinance, or choose a rate that adjusts frequently?
Understanding how interest rates behave, and what influences them, will help you make an educated guess about the direction they will take. The price of money is interest rates, and if you understand what will affect the price of money, you will know better what affects interest rates, including your home loan rate.
The first factor to examine in terms of interest rates is the inflation rate. The inflation rate has two primary indicators edmonton mortgage rate. The PPI (Producer Price Index) and the CPI (the Consumer Price Index).
PPI is the change in prices at the stage where goods are produced calgary mortgage brokers. Consistently rising PPI, raising prices of finished goods, will render all goods more expensive and contribute to inflation.
CPI, or Consumer Price Index is the difference in prices at the consumer level, as determined by a standard basket of goods. Most people are more familiar with CPI because it more directly has an affect on what they pay for goods. Certain segments of CPI can “skew” the percentages, so analysts frequently remove changes in food and oil prices, which are often too volatile. This allows them to look at the core inflation rate to better analyse where overall prices, and therefore inflation, are going.
Gross Domestic Product is another inflation, and therefore interest rate, indicator. The Federal Reserve Bank attempts to keep the economy growing at a ideal rate; too slow and production will lag, causing a recession; too fast and the economy may overheat. Central banks intervene in the money markets to influence the supply of money to slow the economy down or speed the economy up.
The next most important interest rate indicator is the unemployment rate. Low unemployment is thought of as inflationary since employers have to chase after too few candidates, and will increase wages to do so. If the economy has high unemployment, interest rates will fall because salaries will fall because employers do not feel compelled to offer higher salaries to retain workers. In other words, higher wages lead to a wage price spiral and decreased wages bring prices down.
The prospective home buyer can help himself by keeping an eye on these indicators to try to determine rates. The bigger picture to watch out for is a falling GDP with unemployment which will predict lower rates. Increasing GDP and low unemployment means the economy is picking up and you can expect higher interest rates in the future.
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