Interest rates shape the monetary policy of countries or geographic areas. To the point that it has very direct effects on the lives of citizens. Not surprisingly, they are closely related to the money price. At the moment, interest rates have an uneven evolution on either side of the Atlantic. In other words, they have taken different paths in the United States and the European Union, two of the most representative economic zones in the world. And that in a certain way, they are conditioning the evolution of equity markets around the world.
Basically, interest rates are what determine the price of money, in one sense or another, as you will see in this article. In any case, it is also convenient that you take into account that they are modulated according to the inflation rate. Where the cost of life is taken into account to determine whether or not it is convenient to raise them. It's about a economic data very important that has many derivations in various sectors of the economy. And that have gained special relevance after the economic crisis that developed in 2008.
For you to understand them better, you should know that the interest rate or interest rate is the price of money, that is, it is the price to pay for using an amount of money during a certain time. It is essential to carry out any economic transaction. As for example, at the time of demand a personal loan or mortgage. But also to detect the profitability of savings or investment products. Since depending on their evolution, they will go up or down in one or another intensity. Even with practically zero performance, as is happening at the moment.
Interest rates: different strategies
In any case, the best example to explain what interest rates are is to go to what the main monetary authorities in the world are doing. In this sense, the European Central Bank (ECB) has decided lower the price of money as a formula to solve the problems derived from the economic crisis. That is, the value of money in this economic zone is currently 0%. This means that the banks apply a lower interest to the loans demanded. As on the other hand. It happens at this time when they have gone down to 7%.
Another effect of the monetary strategy in the EU is that the profitability of banking and fixed income products falls sharply. To the point where time deposits, bank promissory notes or high-paying accounts are no longer they barely give you an interest of 0,5%. All this as a consequence of the cheaper price of money in this economic space. As you may well have seen, its effects are totally different depending on the needs that you demand from your financial institution. But in any case, it affects your relationships with the world of money.
Progressive rise in the United States
Another very different scenario is the one that occurs on the other side of the Atlantic. Where interest rates are going to rise progressively during this year. Although it is in a slow way until it is in a range that oscillates between 1,50% and 2%. It is the decision that will be made from the Federal Reserve of the United States (FED). This in practice means something as simple as that the profitability you made with your savings will be more satisfactory than until now. While on the contrary, it will cost you more to finance yourself from now on. This is a scenario generated from the strength of the United States economy.
As you may have seen, there are two scenarios that present important divergences. And that in some they can benefit you while in others the effect will be completely the opposite. With a point in common in both economic spaces and that is that inflation seems to be controlled as a result of the application of these monetary measures. Because if it hadn't been like that, it couldn't have developed in this way. In any case, from now on you will have a little clearer on the incidence of interest rates in the purely economic sphere. Do you want to verify other links of special importance?
Depending on supply and demand
Another aspect to take into account to explain the importance of interest rates is based on a tight law of supply and demand, which is always regulated by the financial markets. As a consequence of these actions, the lower this interest rate, the greater the demand for financial resources and, on the contrary, the higher it is, the lower the demand for these financial resources. It will be a priority factor to raise or lower the price of money through any line of credit.
This means that you can find a more competitive interest rate or not on the credit that you are going to sue your bank. And on the other hand, that your savings may be better paid than before and you have a greater capital in your savings account. As you may have seen, the interest rate is not only an important macroeconomic variable, but it will also serve the relationships you maintain with your financial institution. Through almost all banking products (time deposits, mortgages, pension plans, savings accounts, etc.). With a very clear incidence in your personal finances at any time.
No variations in the European Union
The Governing Council of the European Central Bank (ECB), contemplates for this year a review of its inflation and growth forecasts for 2018 and 2019, in a first estimate on the previous year and what represents that there will be no news in monetary policy this important common economic space. In this sense, from the issuing body of the old continent the rate is kept at 0% with the main objective of guaranteeing that financial conditions are favorable.
Another of the most aggressive monetary policies is the one being developed in Japan to try to boost its economy. So that in this way, it returns to the growth path that it abandoned many years ago and that has led it to adopt a very special economic situation in recent decades. Well, in this case, the Bank of Japan has decided since 2016 to cut its benchmark interest rate, which has placed it in negative territory.
How to take advantage of the interest in the stock market?
Of course, interest rates can help you make your operations profitable in the equity markets. From different strategies that you can apply from these precise moments. One of the most effective is to open positions at the time when the value of the price of money is cut. Usually financial markets they react with great euphoria to these kinds of measures. With a significant revaluation in its main stock indices for a more than prolonged period of time. With a clearly bullish scenario that you cannot miss.
Another of the systems that you can use is based on abandoning the bag in the opposite movements. That is, when there are increases in the rates of special intensity. With a very negative reaction from the financial markets. To the point that they can make you lose money in a very short space of time. On the other hand, you cannot forget that these movements match downtrends of equities. Therefore, they are not good travel companions to make the savings profitable. You will have no choice but to look for other alternatives in investment.
Application in banking products
On the other hand, it is convenient that you know how they develop during the life of a line of credit, whatever its nature. In this particular context, the interest rate remains constant throughout the duration or life of the loan. It is independent of the current market interest rate. Although if at the time you are going to hire him because it will depend on his situation in the markets. In this way, you can take advantage of its decreases or, on the contrary, of its increase in price. In any case, it is calculated based on the average of the interest rates of the previous months. Usually your repayment term ranges from a few months to 3 or 4 years. Although in some modalities the periods can be significantly lengthened.
It will be the amount that you will have to pay to the financial institution for having left you or loaned money. In this way, to finalize it, you will have no choice but to pay your return, the corresponding interest and commissions and other expenses in the management, if any. Generally through a constant system of monthly installments. Although it will depend on whether you can make an early amortization. In this sense, a difference of a few percentage points of can mean a very important saving in the expense of this banking product.