More generally, What are the main driving forces of long term interest rates?

Finance Jan 15, 2021

Expert Solution

The main driving forces of long term interest rates are –

· Demand for money as higher demand expected to increase the long term interest rates

· Supply of money as more supply can decrease the expectations of long term interest rates

· Inflation rate in the country; if the inflation rate is high then the long term interest rates could be high.

· Government borrowings and its fiscal deficit; the government borrowings can increase the demand for money which can increase the long term interest rates expectations.

· Monetary policy of the central bank; it controls the various parameters of the economy through its policy measures including long term interest rates

· International economic environment and exchange rate with foreign currency also have influence on the long term interest rates.

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