subject: Following The Interest Rates- Higher Or Down [print this page] If you are thinking about buying a home or refinancing your present home, you probably are asking yourself if this is the right time. If you think rates will go up, you want to buy now before they do, but if you think they are going to go down, you may want to put off your purchase and take advantage of lower rates.
The interest rate on your home loan will be influenced by many variables and economic indicators, and having a basic understanding of these will help you in your decision. The first thing to understand is that interest rates are actually the price of money and like all prices, they are influenced by supply and demand.
The inflation rate, which shows the supply of money, is the first and most important factor in interest rates. Inflation is measured by two primary indicators called price indicators. The PPI (Producer Price Index) and the CPI (the Consumer Price Index).
PPI is the fluctuation in prices at the stage where goods are produced. If the prices of raw products increase, you can be sure prices in general will increase.
CPI, or Consumer Price Index is the difference in prices at the consumer level, as measured by a standard basket of consumer merchandise. It is considered the most important measure of inflation, since rising prices that consumers pay for goods are at the heart of inflation. The basket of goods used is indicative of the types of goods consumers frequently buy, and because it includes food and energy prices, which can move up and down too much, they are frequently taken out of the equation. This allows them to look at the core inflation rate to understand better where overall prices, and therefore inflation, are going.
GDP is another relatively good predictor of inflation and interest rates. The Federal Reserve Bank tries to maintain the economy on a smooth level, with neither too much nor too little growth, which respectively cause inflation or recession. Central banks act in the money markets to influence the money supply to slow the economy down or speed the economy up.
The unemployment rate is another major part of the economy that affects interest rates. Low unemployment will typically lead to inflation, since it leads to higher wages which will lead to higher prices. If unemployment is up, the resulting decreased wages will mean lower inflation. This is known as the wage price spiral; increased wages lead to increased prices, lower wages to decreased prices.
Keeping track of these interest rate indicators will help you to choose when it is a good time to enter the home loan market. In general, a slow economy, with high unemployment, will mean that interest rates will be coming down, and you should hold off on your borrowing for a while. Higher GDP with little to no unemployment signals a road to higher interest rates.
