Why do interest rates rise?

Answer 1

interest dont exactly rise by themselves, the world bank increases them as part of a monetary policy. unlike other factors in macroeconomics such as growth inflation and unemployment interest rates are managed by humans, of course they are affected by economic conditions but their increase is a government response to combat these conditions its not an interest rate reaction. for example if the central bank saw inflation was rising it would increase interest rates in order to cut consumption by reducing peoples desire to borrow money and increasing teh opportunity cost of not saving money.

Answer 2

The demand for money is variable. If the economy looks like it will be strong in the next 12-18 months, many companies will ramp up their R&D and start manufacturing more goods. Most of the time, they don't have the cash on hand to ramp up their production and they will take a loan out.

If many companies try to take out loans at the same time, the desire for money is higher, and banks will charge a higher interest rate to cover the fact that there are more "buyers" of loans than "sellers" (banks) to offer the loans.

During a slow economy, few businesses want to expand, and there are few loans requested. Low interest rates help to entice businesses to borrow money for expansion.

FYI: Interest rates typically rise in a good economy, and fall in a poor one.

Answer 3

Short term rates are set by the central bank (in the US the FED). Long term rates are determined by the market and the supply of loanable money and demand for loans. Other rates in the economy are a balance between the short and long term depending on the duration and nature of the loan. During recessions the central bank cuts the short rates and then raise them when the economy improves to control inflation by restricting the money supply. Long rates vary less but usually rise when the economy improves or if investors expect inflation to increase.

Answer 4

The federal reserve raises interest rates to keep inflation in check. In other words, by raising interest rates, the fed decreases demand for the dollar because people are less likely to borrow money at progressively higher interest rates. This has the effect of less money in circulation. Less money in circulation puts downward pressure on the price of goods and services because there is generally less money out there to purchase any inventory or services available. Therefore, goods and services must usually charge less money to sell their goods and services. Inflation happens when those goods and services' prices raise in price at a rate faster than about 3.5 to 4% yearly inflation and that is the goal of the fed to prevent.

Answer 5

I won't get best answer for this simple explanation, but basically the government regulates interest rates. If they wish to encourage economic expansion but to increase inflation, they weill lower interest rates to encourage people to take out loans. If they wish to tighten the money supply (reducing inflation) but in the process discourage economic growth, they will raise interest rates. In the 1990s, we went through a period of "stagflation", when more loans are taken out but the economic activity is decreasing. This happens when currency is devalued by something OTHER than the amount of money in circulation. Hope this helps.

Answer 6

Because anything that is a rate is a variable. And interest rates fluctuate with the economy. And the economy is not so great right now so therefor interests rates rise.

Answer 7

because more people get interested in it...well, no... that can't be right...

Answer 8

...good question...don't know...not sure if I want too...