Friday, March 03, 2006

Low Interest Rates & Foreign Central Banks

As interest rates rise in foreign countries that puts additional updwards pressure on interest rates in the US.
The European Central Bank (ECB) announced an interest rates hike by 25 basis points from 2.25% to 2.50%, a move largely predicted by markets.

It has been the second augment of that size in four months and it means that the deposit rate edged up to 1.50% from 1.25%, and the marginal lending rate to 3.50%, versus 3.25% previously. (FXStreet.com; March 2nd, 2006)
Additionally, "The Bank of Japan is also expected, as soon as this month, to end years of an ultra-loose monetary policy of pumping cash into its banks and pinning market interest rates at zero (Reuters, March 2nd, 2006)."

As foreign central banks increase short term interest rates it means that there is growing competition for the slosh of international investment funds. Other things being equal this helps raise interest rates on US mortgages. As foreign and US based investors demand higher returns for their mortgage backed securities (MBS), mortgage rates will increase.

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