Forex interest rates can be defined as the rate charged for the privilege of borrowing money from a forex market lender. Forex interest rates are expressed in annual percentage rates. They are basically two main types of forex interest rate can be applied to currencies and they are the simple and compound interest rates. The simple interest rate is said to be the rate placed on the principal amount initially given by the lender to the borrower where the forex trader (the borrower) have to pay for the usage of the money. Compound interest rate is said to be the rate placed on both the principal amount and the compounding interest paid on the forex currency loan.
The basic determinant of the type of forex interest rate that will be charged by a particular forex trader entirely depends on the opportunity cost which is said to be the cost at which is attributed to the fact that the forex trader/lender will not able to use the money, the amount of inflation, the default risk (where the lender is unable to pay for the specific loan), the time length of the transaction, the interest rate and possible government intervention and the level of liquidity of the currency involved.
THE IMPACT OF INFLATION ON FOREX INTEREST RATES
Inflation and interest rates are two terms of forex that are closely linked together. Inflation can be defined as the rate at which prices of currencies in the forex market rises. The federal reverse is a major determinant of forex interest rates and when the interest rate of a particular currency is lowered, more forex traders have the tendency to borrow more of that currency. When consumers in the forex market have more money to spend, it leads to a growth in the country’s currency economy thereby leading to an increase in inflation. In a rising or increased interest rate, forex consumer turns to save because the profits from savings also increase. Because of this, there will be limited disposable income to spend which in turn leads to a slow economy and decrease inflation.
The federal open market committee are does that set monitory policies. Monitory polices can be defined as the actions put in place that have an influence on the availability and cost of money and credit. The FOMC determines short term interest rate targets with the use of economic forex indicators like consumer price index and producer price index which keeps the economy in balance. By the upward and down ward movements of forex interest rates, the federal open market committee met the goal to ensure target employment rates, stable forex market currency prices and stable economic growth. The federal open market committee increases forex interest rates in other to decrease inflation and decreases forex interest rates in other to stabilize economic growth.
In conclusion, it is very important for forex traders to keep an eye on federal open market committee decisions in other to use the announcements made regarding the increase, decrease and maintenance of the forex interest rate in their daily forex market trading activities. This is because most forex markets can move in advance of the expected forex interest rate and in response to the information made by the federal open market committee.
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