Why Do Interest Rates Change? 3 Key Factors

Knowing the answer to the question, "Why do interest rates change?" can help you decide when to finance a purchase or pay off a loan.

Nothing in life is free, as the saying goes, and that includes borrowing money. Fortunately for consumers, interest rates (the cost of borrowing money) have been low for the past decade and are likely to remain low for several years as the economy recovers from the COVID-19 pandemic. Lower rates mean greater numbers of individuals and corporations will be likely to borrow and spend more money in the short term.

However, interest rates are dynamic and will inevitably rise at some point. Understanding the factors determining interest rates can help you decide on the best time to finance a purchase, pay off a loan, or refinance a loan. In this blog post, we’ll answer the question, “Why do interest rates change?” by exploring 3 key factors for these fluctuations.

What causes interest rates to change?

1. Supply & Demand

Supply and demand is the primary factor that serves as part of the answer to the question, “Why do interest rates change?” The supply of funds available from lenders combined with the demand from borrowers can have a substantial effect on interest rates. For example, as consumers, when our wallets are tighter, we have less bandwidth to buy products and services. This funding squeeze can lead to a decrease in demand and cause businesses to suffer.

Money is the lifeblood that circulates throughout the economy. Governments analyze money supply and develop policies around it that include controlling interest rates or increasing or decreasing the amount of money flowing through the economy for optimal health.

2. Economic Stagnation

Building on the previous point, a stagnant economy is another key factor in determining interest rates. If there isn’t enough money moving through the economy, the Federal Reserve System (America’s central bank) will typically lower interest rates to stimulate economic activity. As a result, banks will be more likely to lend funds to consumers, who will then have more money in their pockets to make purchases and contribute to economic growth.

The Federal Reserve takes this approach because it operates under a mandate from the United States Congress to promote employment, support price stability, and keep interest rates at a moderate level over the long term.

3. Inflation

In other instances, the central bank will raise interest rates in response to concerns about inflation (the increasing cost of living and doing business). Higher interest rates reduce borrowing and lending, and motivate investors to save. In turn, the reduction in the flow of money slows the economy and lowers inflation.

The central bank will typically provide an indication to investors in advance of such rate hikes. Anticipating interest rates to rise prompts investors to hold shorter maturity bonds, positioning themselves to have the capital to invest in new issue bonds after interest rates have climbed.

Make Smart Financial Choices By Partnering With Curio Wealth

The landscape around interest rates is complex, so it can be helpful to speak to a financial advisor if you have questions about what causes interest rates to change and when the time is right to make certain financial decisions as a result. Proper planning can help you reach your goals in the most financially sound and efficient way possible.

At Curio Wealth, we’ll work with you on a personalized financial plan, projecting the growth necessary for your portfolio to thrive so your money will last a lifetime. we’ll also advise on your investments, considering factors like interest rate and inflation risks to build a portfolio with the appropriate amount of risk for your financial situation.

If you’re ready to make a plan for your financial future, schedule a call with us today.

Important Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Curio Wealth, LLC [“Curio Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Curio Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Curio Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Curio Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.curiowealth.com. Please Note: Curio Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Curio Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Curio Wealth client, please contact Curio Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Other Articles You Might Like

subscribe to our newsletter

Your Financial Journey Starts Here

Embark on a path of financial clarity and strength. Schedule a meeting with our team, and together, let’s shape a secure and prosperous future tailored just for you.