The interest rates that banks offer fluctuate depending on the situation of the nation’s economy. The economy of the United States has not been doing very well in the recent past, to say the least. This has resulted in the federal government slashing interest rates. From 4.5%, the interest rate is down to 4.25%. According to banking experts, the interest rates will remain low until 2013, when the economy is expected to recover. Further, different banks in the United States offer different rates of interests to customers. By comparing the rates of different banks and studying all the underlying terms and conditions, you can make the most of the banking system despite the lowering interest.
How the economy influences the rate of interest
In the constantly fluctuating economy, if you want to make the most of your savings, then you need to put your money in the bank at the right time. You can only understand the optimum time for investment by studying the factors that influence the interest rates. There are numerous factors that pull the strings of bank interest rates. One of the major factors is, of course, the economy of the United States. When the bank is doing well and is in a position to pay high returns, the rate of interest will be high. Banks first focus on sustenance. Whatever excess they are left with is distributed in the form of interest rates. For the banks to do well, the economy has to be strong and so, invest your money when the economy of United States is on an upward swing.
Demand for loans
Banks make money through interests that they receive from loans and mortgages that they provide to people. So, when there are a large number of people demanding more loans, it implies that banks receive higher incomes and hence, the rate of interest will be high. Again, the economy of the country comes into play. When the economy is strong, people can spend more and be able to pay interests for the loans that they receive. Further, banks provide loans only after ensuring that the borrower is capable of paying it back. The incomes of people of the US are steady and their jobs are guaranteed when economy is doing good.
Inflation effects the rate of interest
Pressure of inflation on the nation severely affects the rate of interest. Inflation refers to the condition when the rates of all goods and commodities in the country escalate. So, potential borrowers put their plans for taking a loan on the back burner. They prefer for the economy to recover and inflation to dip so that their standard of living can increase and they can afford to take loans. Having to shell out huge amounts for basic commodities such as food and gas implies a fall in interest rates. Owing to inflation the rate of interest decreases for those who invest their money, the rate increases for those who take loans. Understanding the various factors that effect the rate of interest will help you choose the right time to invest and have some good security for your retirement.