Last Updated on Monday, 14 March 2011 10:15
Written by Admin
Monday, March 14th, 2011
Following the Interest Rates- Higher or Lower
by Carlota R. Schneider
If you are considering buying a house or refinancing your present one, you probably are asking yourself if this is the right time. Will interest rates increase, in which case you should lock in a fixed rate mortgage for as long as you can, or are they headed down, which means you want to either put off buying or refinancing, or choose a rate that adjusts frequently?
How are these interest rates determined in the first place, and will understanding this help in the decision making process? The first thing to understand is that interest rates are actually the price of money and like all prices, they are determined by supply and demand.
The inflation rate, which indicates the supply of money, is the first and most important factor in interest rates. And the inflation rate is influenced primarily by two factors. The PPI (Producer Price Index) and the CPI (the Consumer Price Index).
PPI is the fluctuation in prices at the level where goods are produced. If the prices of raw products increase, you can be sure prices in general will go up.
CPI, or Consumer Price Index is the difference in prices at the consumer level, as determined by a standard basket of goods calgary mortgage broker. This is a very important signal of inflation since this is what we will all pay for our goods. Often, to remove some of the volatility of the CPI, analysts will look at core inflation, which removes energy and food prices from the formula. This leaves what is considered the “core” inflation rate which is a better indicator of general prices and inflation.
GDP or Gross Domestic Product also is a predictor of inflation and therefore interest rates. Central banks aim at slow, steady growth in the economy, since no growth means recession, and too fast growth means inflation edmonton mortgage rate. Central banks intervene in the money markets to control the supply of money to slow the economy down or speed the economy up.
The unemployment rate also has an impact on interest rates. Low unemployment tends to lead to inflation, since it will lead to higher wages which leads to higher prices. High unemployment usually leads to lower interest rates over time since employers can keep wages lower since there are so many candidates for each position. Higher wages lead to price spirals while lower wages lead to prices falling.
Keeping track of these interest rate indicators will help you to choose when it is a good time to enter the mortgage market. The bigger picture to watch out for is a lower GDP with unemployment which will predict lower rates. Growing GDP and low unemployment may signal a faster growing economy and rates will probably be increasing.
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