Levels of Interest Rates in the Markets - Case Study Example

Hоw thе роliсy mаkеrs аnd invеstоrs lооk аt thе оbsеrvеd lеvеls оf intеrеst rаtеs in thе mаrkеts? Introduction The inflation rate as well as the interest rate expectation as well as companies are significant variables that determine the price of the bond. They are important in establishing the level of consumption, the debt level as the general trend in economic situation worldwide. Where there is high inflation rate, there will be growth in nominal interest rates and hence reducing the price of the bond and the interest rates will move in the opposite directions. The market anticipation concerning the future interest rate will growth or decline which depicts an effect on the yield curve and hence affective the interest rate for the debt securities. The implications of the observed levels of interest rates Due to low interest rate, the net returns on short term financial instrument are merged some time. The money market fund in this situation will experience withdrawal. Against the backdrop of reduction in asset under management at money market funds, the amount of liquidity existing for the MMMF bank’s purchases of debt securities will fade as well. This situation might hence lead to further restrictions on credit institution right of entry to financing. In this regards, the governing council verdict to reduce the interest rate on ECB deposit facilities to zero triggered some concern that more reduction in money management may lead to intensification or pressure on money management funds with potential negative impact for the banks financing circumstance (Jan Peil). Beside this, imminent polices requirement concerning the bank’s financing plans will depict a favor to retain financing over the market based financing. This development may hence weight on banks security based financing efforts. The banking industry seem to have forecasted these progression by entreating and upheld the retail deposits stems from money holding divisions and align the risky non bank resources. The respective flow eventually leads to enhancement in banks financing situation. Money demand at very low interest rates hypothetical considerations recommends that extrapolation of money demand tendency that has been depicted within the range of normal level of interest rates to the case in which the interest rate approach will be zero may not provide dependable information. Nevertheless, the likelihood of money demand might be subject to substantial changes as interest rates turns to be very low having significant effect for monetary policy (Morton). This is due to the fact that a typical growth in money holding as interest rates approach to zero might be incorrectly interpreted as sing of change of monetary stimulus and thus the growth of expansionary pressure, when in reality it might depict a change in custom money demand tendency. Hypothetical proof for the effect of low policy rates over a certain time is limited, but is existing for instance in us and Japan. Research provides that new funds tend to be placed in a long term and risky asset to benefit from these assets yield pick up. There is no hypothetical sings of large scale stock adjustment out of monetary debt that might put financial institution under financial distress. Interest rates stimulate business and corporate sectors Low interest rates make borrowing to be cheap for businesses, this tends to motivate spending and venture leading to high aggregate demand and economic progression. The growth in aggregate demand leads to inflationary pressures. The effect of low interested rates is that, it will lead to; Reduce the incentive to save since, low interest rate provide small returns from saving. The low incentive to save will motivate consumers to spend instead of saving. Cheap bowing cost since, low interest rates makes the financing cost to be manageable, this will lead consumers encouragement and companies will take more loans to fund more spending instead of holding money. Cheap borrowing cost. This is because, low interest makes the cost of borrowing to be cheap and hence encouraging consumers and companies to go for more loans to fund greater spending and venture. Low mortgage interest payments; a decline in interest rates will lead to a reduction in the mostly mortgage repayment cost leading to more disposable income for householders which will lead to growth in consumer spending and economic growths. The low interest rate motivates extra investment spending which lead to economic growth at the time of stunted economic growth. The adjustment of interest will affect the demand for goods and services. Interest rates fluctuations might depict a large effect on stock market, inflation and the economy in entirety (Weber). The low interest rates are a strong tool for growing the venture spending and try to steer the economy and clear the recession. A change in interest rate affects the demand of goods and services and hence the aggregate venture spending. A reduction in the interest rates lowers the cost of borrowing which motivates business to growth the venture spending. Low interest rates as well provide financial institution more incentives to lend to business and households, permitting them to spend more and hence economic growth. What policy makes can do to improve the economy While reducing the cost to business turn to be the principal centre on economic progression policy, more states cuts the tax rates. These notions are motivated in ways to attract workers/labor force in other regions of the world to steal jobs by providing incentive to business leaders. But the prevalence of proof depict that this strategies is less effective and less efficient. Others factors like skills, wages, input ad output are some of the other important aspect to be taken into consideration in ensuring that the economy is growing. There is need to grow the investment in public university research and boost the education system since, it will improve the rate of innovation as primary research is spun off in new private investments and upholding the leadership role in the new technology (sexton). Lack of venture in education weakness the capacity of economic growths and attracts business that provides highly skilled, high wages jobs Presence of strong education system is good and not just for the nation economic, they are good for the people. The government invests heavily in improving the living standard of its people and hence creation of job opportunity in which individual might get jobs that are paying to provide support to their family needs and provision of economic security. This would lead to virtuous cycle since, people working and cannot afford to buy goods and service support the local business and local economy. There is a strong link between education and income. More educated person will be likely to be unemployed. But the advantage of education surpasses the economic return. High; level if education corresponds to enhanced health and low rate of mortality and crimes which is a good basis for improved economic progression. The implications of the flat yield curve for investors The implication of flat yield curve is that it will lead to high short term rates. Investors with huge short term bond funds who seek security might face risk because the rats depict an adverse connection to price. Of the short term rates growths, past tells us that short term bond price might decline (Aravossis). The flattening of yield curve will lead to growth in short term rates as long term rates turn to be steady. In this regards, tactical bond plans might aid in mitigating for interest rate risk. Plans that seek to get rid of interest rate risk might be helpful to investors in mitigating risk and exploiting chances in the bond market. Are low interests rates are to blame for the problems facing many industrialized economies? The low interest is not to be blame since, the decline in interest rate for the last two decade to advanced economics from 4% to 6% growth in 1990s to close to zero in recent times. Even thought the recent decline came after the global recession and afterwards recession, the decline in yield, specifically for long term rate start much earlier. It might be persuasive to link the decline in yields to the action of central bank bit this might be consuming cause and effects. Low yield have been linked to mainly low real interest rate, unlike a decline in inflation anticipations, whiles the decline in policy rates depicted the fact that upholding stable inflations with the output at potential needed very low short and long team real rates. Intervening by the Central banks in Treasury markets to steepen the yield curve and widen the gap between short- and long-term rates The central bank must intervene since, there is Deeping worries over the capacity of the central bank to intervene and stimulate economic growth as a result of growth in the bond yield and sparked a short period of risk off trading. The widening of the long and short term is a reversal of a trade that is depicted overtime in which the long-term treasury price grows and the yield declines as foreign investors gulp up the securities. These recommends that many investors are starting to question the negative interest rate policy adapted by the European central bank and the bank of Japan. The market is not driven by the economic fundamentals or the fed policies in long terms of the market but it is being influenced by the worldwide interest rates. The steeping and flattening f the yield curve depict to possibility; doest the growth in US treasury yields and the steepening of the yield curve recommends an economic growth to be very certain which implies that less is needed for safe haven government bonds and improved demand for credit. If this is the case, then the central bank will not intervene in the stock market (Hubbard). If the steepening in yield curve would imply that an investor is worried concerning the worsening the US fiscal point of view or susceptible to collapsing in US dollar as the central bank floods the world with newly minted currencies as part of its quantitative easy plans, the implication will be an argument to supplement a step up resource acquisition and hence, call for the central bank involvement in stock market the yield curve and widen the gap between short- and long-term rates Conclusion Articulating the variables that go into establishing the policy rate as well as its susceptibility of future trend may force policy makers to be more regimented concerning the process of setting the interest. Making the working of the methodology existing to the public may make the market participant and policy makers a better standard of information that may be important in forming a forecast concerning the future trend in interest rate and the yield curve. Bibliography Aravossis, Kennedy. "Environmental Economics and Investment Assessment." Financial Times (2006). Arrunada, Benito. "The Economics of Audit Quality: Private Incentives." Bloomberg (2013). Hubbard, Glenn. "Essentials of Economics - Page 453." The economist (2012). Jan Peil, ‎Irene van Staveren. "Handbook of Economics and Ethics." Journal of economics (2009). Morton, John. "Advanced Placement Economics: Macroeconomics :." Financial times (2003). sexton, Robert. "Principles of Economics Volume 2 of 2 - Page 744." Wallstreet journal (2014). Weber, Edward. "A short history of derivative security markets. Crawley." University of Western Australia, Business School, Economics Program (2008). Read More