Market Jargon Buster 4
The Tradefair Trader 
/ Tradefair Team / 26 March 2008 / Leave a comment
The final part of the series that has gripped the internet like nothing since Google. This week, interest rates, so called because a lot of people rate them as interesting...
Your mother may have taught you at a young age that nothing in this world comes for free. No doubt trying to deter you from morphing into a thieving miscreant at the age of seven, such maternal wisdom is also the basis for interest rates.
Few people fail to take a sharp inhalation of breath when considering the purchase of a house. There aren't many who can just pitch up to the old estate agent, drop a large briefcase rammed to the brim with cash, and grab the keys. Enter stage left the banks to the rescue, loaning large sums of money to home-buyers, in order to add liquidity to the housing market.
However, unlike the career of Scott Carson, there is always a catch. The central bank charges interest when it loans the smaller banks, building societies etc, the rates of which are set by the central banks every month or so, and which ultimately trickle down to the consumer.
Whilst I could wheel out formulae such as it = rt + 1 + πt + 1 + σ to explain how this is all calculated, there are some easier methods to accrue knowledge on these betting markets, and these don't have any mention of π.
Put simply, playing with interest rates are the best way for central banks to control the amount of money floating around the economy. When there is too much money in the economy (I know - a ridiculous concept - they can give me a bit if there is so much) relative to production, interest rates will be raised to try and lower demand to meet supply.
When the economy is struggling however, more people will need to borrow money, and hence the bank may lower interest rates to keep people out of penury.
On this basis, the men in suits dip their hands into the tombola, and draw out a figure representing a rise, fall or occasionally no change in the interest rates.
So watch the economy, check what has been done in the past, and get involved. Tradefair offer a range of binary markets on how up or down interest rates will be in the UK (the Bank of England,) America (the Federal Open Market Committee,) and Europe (set by the European Central Bank.)
