What influences forex interest rate decisions?


A number of factors influence interest-rate decisions. It can generally depend on one central bank to another. Central banks usually have mandates. The mission can be to preserve price stability or to guarantee low unemployment.

For example, the U.S. Federal Reserve Bank has a dual mandate to maintain inflation and jobs. Recently, New Zealand’s Reserve Bank also began a dual mandate.

Therefore, depending on the central bank, variables may change.

Generally, a central bank begins determining the inflation rate it wants to target as well as the unemployment rate. Then it can continue affecting interest rates.

With low rates, the central bank encourages economic borrowing. This increases job creation and demand. As demand rises, you can see this demonstrated by increasing GDP, lower unemployment.

When GDP and unemployment rate are on target, that gradually raises inflation. Higher inflation arises as investors buy more commodities. Higher demand leads to higher prices.

To combat inflation, the central bank must raise interest rates. In addition, lower demand for commodities pushing down inflation. By doing so (higher interest rates and lower interest rates), the central bank can maintain or attain inflation and unemployment rates
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