Major Determinants of Interest Rates
Major Determinants of Interest Rates
Inflation
Inflation is a factor that decisively affects the nature or outcome of interest rates. “Inflation is an increase in prices of goods and services over time”(Financial Institutions, Instruments and Markets, 2012). Inflation is the natural byproduct of a robust, growing economy. No inflation, or deflation (the lowering of prices), is actually a much worse economic indicator. Also, in a healthy economy, wages rise at the same rate as prices. A standard explanation for the cause of inflation is "too much money chasing too few goods" This is also called the demand-pull theory. For several possible reasons, more money is being spent than normal. This could be because interest rates are low and people are borrowing more. There's not enough supply to keep up with the rising demand for homes, cars etc. Manufacturers are producing goods at a slower rate than people are demanding goods. When supply is less than demand, prices go up. (How Stuff Works, 2012) Different types of interest rate are linked and influence each others, for example if unemployment rates were relatively high the RBA would lower interest rates so that the functioning of the financial markets remain positive and Australia would continue a healthy economic status.
The inflation rate in Australia was recorded at 1.20 percent in the second quarter of 2012. Historically, from 1973 until 2012, Australia Inflation Rate averaged 5.83 Percent reaching an all time high of 17.60 Percent in March of 1975 and a record low of -0.30 Percent in September of 1997. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. (Trading Economics, 2012)
Inflation target is a tool to guide monetary policy expressed as a preferred range or figure for the rate of increase in prices over a period. In Australia, the inflation target is between 2 and 3 per cent per annum on
Inflation
Inflation is a factor that decisively affects the nature or outcome of interest rates. “Inflation is an increase in prices of goods and services over time”(Financial Institutions, Instruments and Markets, 2012). Inflation is the natural byproduct of a robust, growing economy. No inflation, or deflation (the lowering of prices), is actually a much worse economic indicator. Also, in a healthy economy, wages rise at the same rate as prices. A standard explanation for the cause of inflation is "too much money chasing too few goods" This is also called the demand-pull theory. For several possible reasons, more money is being spent than normal. This could be because interest rates are low and people are borrowing more. There's not enough supply to keep up with the rising demand for homes, cars etc. Manufacturers are producing goods at a slower rate than people are demanding goods. When supply is less than demand, prices go up. (How Stuff Works, 2012) Different types of interest rate are linked and influence each others, for example if unemployment rates were relatively high the RBA would lower interest rates so that the functioning of the financial markets remain positive and Australia would continue a healthy economic status.
The inflation rate in Australia was recorded at 1.20 percent in the second quarter of 2012. Historically, from 1973 until 2012, Australia Inflation Rate averaged 5.83 Percent reaching an all time high of 17.60 Percent in March of 1975 and a record low of -0.30 Percent in September of 1997. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. (Trading Economics, 2012)
Inflation target is a tool to guide monetary policy expressed as a preferred range or figure for the rate of increase in prices over a period. In Australia, the inflation target is between 2 and 3 per cent per annum on