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July 04, 2007

Why have interest rates jumped?

It seems like the economy was moving so smoothly along and then -- bam -- interest rates took a big jump! Many investors as well as borrowers were caught off guard. What happened? N.C. State University economist Mike Walden offers two reasons why the interest rates headed north so fast.

"There are a number of potential reasons. One is inflation," says Dr. Walden, a North Carolina Cooperative Extension specialist. "Usually we see when inflation rises, interest rates will rise. But actually the inflation numbers have been very tame -- very good -- recently. So I think we can eliminate that as a reason.

"Other people would say, 'Gas prices. Well, they've got to be pushing up everything, including interest rates,' but, again, gas prices recently have taken a tumble.

"Instead I think the rise in interest rates reflects two new assessments on really the world economy," he adds.

"First that the worldwide economy is growing fairly well, and this is meaning that a lot of people are borrowing money. They are building things. Construction worldwide is at an all-time high, and this puts upward pressure on interest rates.

"Secondly I think it reflects optimism actually about the U.S. economy," Walden says. "The U.S. economy in the first half of this year has been rather slow. There are a lot of signals that this is going to pick up in the second half of the year. That is going to imply more spending -- more borrowing. And again that puts more upward pressure on interest rates.

"So in some sense," he concludes, "you can say the higher interest rates really mean a good thing."

Posted by deeshore at July 4, 2007 08:00 AM