Some of the Roles the Official Bank Interest Rates Play

The average person regards bank interest rates as a vehicle for making money cheaper when they go down, and making money more expensive when they go up.

People are mostly concerned about how much more or how much less they will have to find to for their mortgage and automobile payments, etc.

However, there are other roles the official bank interest rates play.

When a country increases its official bank rate, those with money on deposit earn more cash for it. It does not mean only the locals, but overseas investors start placing their money into that country as well. For that to happen, they are obliged to purchase the currency in question, which requires selling a currency they hold. It also means that those who were thinking about selling their domestic currency before the rate increase, may well change their mind since they would now hope to be able to earn more money by staying put.

Thus, a scenario might develop creating more buyers than sellers, prompting the currency to appreciate.

However, there are two sides to that, because the speculators might figure it may not be prudent to invest money into the country just because its interest rate was raised. They may interpret that situation in a different way, and have their own ideas about the position of that particular currency. Therefore, the currency which anyway might not have been the flavour of the month, can become the recipient of a rather negative sentiment, and consequently even start depreciating.

Every country needs to trade, and goods have to be manufactured and exported to earn foreign money. Of course to make things, you have to buy raw materials to make them. If your currency is weak, the raw material will become expensive since the foreign currency has to be bought to get that material. However, if your currency is too strong, the goods will be expensive to export.
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Finding the right balance and not overshooting one way or the other takes time and particularly if a series of other factors keep coming into the equation, thus causing all sorts of volatility. As can be imagined, not many businesses are keen to se going on for too long.

The central banks purchase and sell currencies in order to keep things in some sort of shape they would like to see. These kind of treatments and interventions can push the value of the currency up or down for a certain limited time.

Being able to understand the full role of the official bank interest rates and the reasons for their introduction, can be of value for both the foreign currency and property investors.

If playing these markets, remember that to make a profit it is important to use the best tools for the job. In the case of foreign currency needs, the various companies that provide really excellent service offering cheaper rates than the high street banks do, can be found with ease on the internet. By phoning around, one can soon discover the best currency rates going.

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Consumer Prices And Housing Fan New Economic Fears

Consumer prices plummeted again at a record pace and groundbreaking on new homes slumped to a new low in November as the recession-hit economy lost momentum, government reports on Tuesday showed.


The latest signs of economic distress came hours before Federal Reserve policy-makers were expected to announce another reduction in official interest rates, and the data kept alive speculation they could cut by even more than half percentage point to ward off deflation risks.

"I think we're in a deflationary spiral that will probably go on until sometime next year," said Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co. in New York. "I think it will probably go on through the majority of 2009."

The Labor Department said its closely watched Consumer Price Index dropped 1.7 percent after falling 1 percent in October -- back-to-back record drops since the department started keeping monthly data in 1947. Core prices, which exclude food and energy items, were flat in November after declining 0.1 percent in October.

On a year-over-year basis, core prices were up 2 percent in November, a level that normally would please U.S. central bank policy-makers, but prices still appear to be headed down.

The Commerce Department said housing starts dropped 18.9 percent to an annual rate of 625,000 units from 771,000 units in October, the lowest since the department started collecting monthly starts data in 1959, and well below the 740,000-unit pace that Wall Street analysts had expected.

"The housing starts data is another bad sign for the overall U.S. outlook," said Brian Dolan, chief currency strategist for Forex.com in Bedminster, New Jersey. "There's zero sign of any stabilization, dashing what had been some optimism that we were perhaps bottoming out."

Soaring foreclosures and a drop in home building already has helped produce the worst financial crisis in decades and tipped the economy into recession last December. Many economists think the downturn is worsening steeply as 2008 ends and any recovery will be delayed past mid-2009.

The prices report showed that, on a year-over-year basis, consumer prices gained just 1.1 percent after a 3.7 percent increase in October. It was the smallest rise since mid-2002.

The yield on 30-year U.S. Treasury bonds hit a record low after the price data was issued and the dollar weakened against other major currencies. But stock prices posted modest gains on the expectation of an interest-rate cut.

So far in 2008, overall consumer prices have risen at an annual rate of 0.7 percent, sharply lower than the 4.1 percent gain for all of 2007.

Energy prices plummeted 17 percent last month, double the 8.6 percent fall in October. It was the largest monthly decrease in energy prices since the department started monthly records in 1957.

Gasoline prices tumbled a record 29.5 percent on top of a 14.2 percent October drop and were 47 below the peak they hit in July. Natural gas prices fell for a fourth straight month, which may benefit consumers in the winter heating season.

But jobs still are disappearing at an accelerating pace and consumers are wary about spending amid reports that not only the U.S. but much of the global economy is in recession.

Food prices in November were up a relatively slight 0.2 percent after a 0.3 percent October rise. It was the smallest monthly gain in food costs since March.

The housing report also pointed to a protracted downturn for that hard-hit sector. New building permits, an indicator of builders' future plans, dropped 15.6 percent to 616,000 units from 730,000 units in October. That was also much below Wall Street analyst estimates of 700,000 and the lowest since records began in 1960.

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