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Factors that influence interest rates

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Interest rates are the lifeline to all financial transactions, determining the amount being paid out or being charged based on the type of transaction. They can be either fixed, or vary over time. While select investments in ideal economic conditions enjoy an interest payout, debts are charged an interest to compensate for the risks involved in lending out money. There are varying ways in which interest rates are used to calculate the interest amount; however, the rates themselves are influenced by different factors.

Factors that influence interest rates include, but are not limited to:

  1. state of global and local economies,
  2. inflation,
  3. demand and supply of financial instruments, and
  4. monetary policies.

Healthy local economy, with people having enough repayment capacities, often see interest rates that vary based on the demand for funds, rising when loans are heavily sought and falling when the need subsides. Monetary policies of a government also influence interest rates, when it tends to moderate the availability of funds in the economy, by adjusting the interest rates on investments and debts.

The fluctuating value of currencies also plays a significant role in determining the interest rates on several types of transactions. Inflation is also known to affect interest rates, especially on loans, as the purchasing power of the money loaned out may not be the same when repaid. Rates on investments, however, hardly see any significant movements though. Foreign investments flowing into a country ease the availability of funds and make interest rates more affordable.

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