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key factors influencing interest rates

Balance of payments

There is an inverse relationship between bond
prices and market interest rates. Bond prices rise
when interest rates fall and vice versa. Therefore,
if you want to be a bond investor you should have
a basic understanding of the factors that influence
interest rates and how interest rates are set.

...•
The balance of payment, record, F'II s trade
with the rest of the world. If Fiji imports more
than it exports it may have. a d~ficit balance of
payments. Overtime this. SItuation puts pressure:
on interest rates to rise. There would be less.
pressure to increase interest rates if Fiji's balance
of payments position was improving or the deficit
was shrinking:

Inflation and economic growth
F

.
keeoi
b
. fl'
.
or every Investor. eeplng ta 5 on In anon 1$
very important. Suppose an investor holds a
Government bond that yields 8%. If the economy
grows rapidly. inflation will eventually begin to
climb. Inflation can be measured by changes in the
consumer price index and is 3 general measure of
how quickly the cost of good, and services is rising
over time.
Faced with the prospect of higher inflation,
investors will typically demand an inflation
premium since their fixed coupon wlll be Y:'0_~h
less in real terms, so will the principal repaid on
maturity. In our example. bond yields might rise
to 10% in which case the 8% bond become' less'.
attractive

and its price will decline.

Some other factors that could influence the level
of interests and therefore bond prices include
the demand relative to the supply of money and
the level of overseas interest rates and foreign
exchange rates,

Demand for and supply of credit

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..

as.i~';v~~i'o~~,:""

This process

also works in reverse.

Any marker

force that causes economic 'e<ivity to decli~e: or
the inflation rate
drop, increases the Iikehhood
that the Reserve Bank will lower interest rates and
bond prices will rise,
B d i
h
f
b
f
on lnvenors. must t ere ore e aware 0,
developments In the economy,. the pace of inflation
and implications for Reserve Bank of Fiji interest
,
rate po Iley.

'0

--itend

[0

rise

:3~~

vi~e versa,

International interest rates

would prefer to own the new 10% b~~d.'-Thus any market forces that cause die eccncrny .
to grow mor-e rapidly -.9r-.~3us~.the_inna.~i9n. rate'
to rise, increases the Iikeli~ood that the Res?'!'e
Bankwill raise interest rates ~~ddecre~.~~.prjc_~s
of bonds.
.

Interest rate, represent the price paid for the use
of money and represents the i~t~I"i3.~~onbetween
demand for and supply of credit In F'I'· When
demand for credit (or borrowing) exceeds the
supply of funds available for lending, interest rates

lnteresr rate differentials between countries
where investors are going to place their
funds, If interest rate, in Au,trali. rise. Australian
. ~dollarinvestmentsbecome more attractive than
Fiji dollar investments, Fiji interest rates may then
'il10ucnc:es

I:

'0 attract offshore investment
Foreign exchange rates

rise

funds.

Exchange rates affect the prices of goods being
imported and exported. If the Fiji dollar" strong,
this will make Fiji exports more expensive and
reduce the cost or imports. This can have a
.
neganve effect on our balance of payments and put
upward pressure on Interest rates and vrce versa.