Money and Banking: Interest Rates, Inflation, Exchange Rates, and Stocks vs Bonds

This article discusses recent newspaper articles on interest rate changes, inflation in the US, UK sterling pound exchange rate with US dollar, and the lead-lag relation between the stock and bond markets. It provides insights on the impact of these factors on the economy and investors.

Running head: MONEY AND BANKING 1
Money and Banking
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PART A
Discussion on Newspaper Articles on Interest Rate Changes
A large number of individuals are very interested in the interest rates variations. This is
based on the notion that interest rates hit wallet as in the amount of cash an individual pays in
borrowing money. Interest rate is tied to particular period of time, which is represented as annual
percentage rate. Governments are also interested in the interest rates since they utilize their
authority in setting interest rate as the tool to influence pace of the country’s economy as well as
rate of inflation, using relatively lower interest rates in promoting more economic development.
With these considerations, this section aims to present analysis or discuss three recent
newspapers on interest rate changes. The analysis will start with presentation of the main topics
presented in these newspapers, followed by analysis on how these newspapers articles would
influence the economy of the country as well as opinions on interest rate variations.
To start with, the first newspaper article is Capital Business, with the main topic being,
“Higher interest rates, loans lift Bank of America profits”. The second article is The Economist
with topic representation of “Automation will drive interest rates higher, a new report
concludes”. Finally, there is the Express with the topic headline being “Carney warns interest
rates will increase in bid to control inflation”. These articles are expected to have significant
influence on the local economy. For instance, the information contained in the articles regarding
increase in interest rate would result in domestic price pressures, hence, forcing overall wages
up, making the Central Bank to increase their borrowing expenses, which would in turn place
more pressure on Commercial banks to raise their interest rates in turn. Furthermore, with
increase in interest rate, there would be significant decrease in the country’s GDP growth which
is expected to continue over the next few years. Higher interest rate would also leads to loan

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default among many firms and homeowners, which would in turn result in decreased economic
growth.
In my opinion, the recent variation in interest rate would have significant impact on the
country’s economy. For instance, a decrease in the interest rate would be accompanied by
corresponding increase in the inflation forcing consumer to spend less since they believe
purchasing power of the dollar would be eroded by the inflation. Furthermore, increase in the
interest rate tends to moderate the country economic growth. This is due to the fact that increased
interest rate result in an increase in borrowing costs, reduced disposable income and thus limit
economic growth in the consumer spending. Besides, given that increased interest rate result in
an increase in consumer spending, the information contained in these articles is expected to raise
import bill in the country and place significant pressure on the foreign reserve levels. Thus, I feel
that increased interest rate could assist the country’s economy by discouraging individuals from
spending less.
Therefore, from these articles, I feel that the benefit of having low or high interest rates is
dependent on state of the country’s economy. Here, low interest rate is considered beneficial
when a country’s economy is weak since it encourages individuals to spend more money which
in turn increases demand for products. As a result, it encourages different organizations to raise
their sales and productions, hence, supporting economic expansion and more job opportunities.
High interest on the other hand is crucial at times. This is due to the fact that it result in high
inflation. This leads to increase in spending and in turn raise import bill as well as place some
pressure on the foreign reserve levels. In this case, high interest rates would help the country’s
economy by discouraging individuals from excessive spending, which would in turn assist in
cooling the economy as well as bringing it to normality. Therefore, there is need to balance

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interest for borrowers and savers in ensuring continued flows of finances from the savers to the
investors.
To sum up, it is evident that interest rate has significant impact on the general economy.
This is due to the notion that it results in decreased or increased level of consumer spending
which would in turn result in increased or decreased economic growth depending on whether it
increases or decreases over time.
Discussion of Newspaper Article on the recent development on Inflation in US
The major topic of the three major newspapers include “US inflation; the five things to
watch” by Financial Times, “US inflation remains low and that is a problem” by New York
Times as well as “Nobody seems to know why there is no US inflation” by Financial Times. New
York Times article stated that little inflation could brighten economic mood, causing corporate
profits and wages to increase more quickly. On the other hand, according to Financial Times
(2017), despite the recovery which is currently the third-longest, U.S is trapped not in the
double-digit inflationary increase, but the slow-inflation quandary. This is evident by price
increase jumping in August 2017 driven by accommodation and energy price. According to
Financial Times (2017), fluctuation in the crude oil prices is said to have contributed
significantly to variations or increase in inflation. Furthermore, exchange rate fluctuation
between US dollar and currencies of the American trading partners could also have played a
significant part as well. Trade-weighted dollar that is said to affects inflation via import prices
decreased by around 10% in January 2017 in comparison to 2016. This was notable since dollar
rallied assisted in keeping inflation low in the year 2015.
According to Brooks (2018), the major causes of inflation in the US have been output
gaps, dependency and demography ratios, fiscal deficits as well as crude prices. For instance,

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inflation decrease was found to coincide with global largest increase in the oil prices.
Nonetheless, in 1998 to 2008, where oil prices were found to increase by 7%, inflation was
found to have decreased continuously and consistently. Therefore, with these facts, while
inflation is said to experience differing trend across the globe, two trends could explain advent of
the decreasing inflation globally with first being the wake of OPEC and the second one being
advent of the unlimited supply of the skilled labour. Besides, changes in the demography as well
as dependency ratios are also major causes of the decrease in inflation. While looking at
decreasing shares of the working aged individuals across the advanced or developed countries,
there are consistencies alongside the structural decrease in the inflation rate. Nonetheless, most
consistent explanation for decreasing inflation is significant increase in the college graduates
across the globe in comparison with such supply within the West.
Generally, based on the three Newspaper articles, inflation rate in the US is mainly
attributed by increase in accommodation and energy prices, variation in demography and
dependency ratios, advent of the decreasing unlimited supply of the skilled labour as well as the
wake or introduction of OPEC. The increase in inflation is said to cause a decrease in economic
growth with joblessness or unemployment increasing with a significant margin. Furthermore,
Financial Times (2017) argues that weak inflation might prompt financial institutions to leave
policies loose which would inadvertently strokes up the cycle of bust and boom. This would in
turn result in interest rates which are too low in relation to what is consistent with the
macroeconomic and financial stability. Inflation is also found to hinder economic mood, causing
corporate profits and wages to decrease more quickly (New York Times, 2018).
In conclusion, it is evident that inflation would have significant impact on the country’s
economy. For instance, it would result in increased unemployment rate as well as increased

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poverty level in the country. This would in turn result in increased crime rate within the country.
Hence, there is need to address the increasing trend in inflation rate in US early enough to avoid
increased jobless rate and deteriorated economic growth over the years.
PART B: Comparison of UK Sterling Pound Exchange rate with US Dollar
Exchange rate is the price of a particular nation’s currency in line with the other. It might
be expressed as normal rate for a given time. Basically, exchange rate are usually classified by
IMF into three chief groups, replicating the function of authorities in determination of exchange
rate or multiplicity of the exchange rate within a particular nation; the market rate. With these
considerations, this section presents UK currency exchange rate history in comparison with US
dollar.
Based on Table 1 below, it is evident that UK sterling pound to US dollar for the past one
year experienced several sudden as well as sharp increases and decreased in exchange rate, with
several periods of constant exchange rate. Basically, British Pound fluctuates in value against US
dollar, although there might be some correlation between the movements in British Pound
exchange rate with US dollar. Therefore, the sudden increase and decrease in British Pound as
indicated in Figure 1 below might be as a result of inflation as well as rise in interest rate over
the year. Such is said to cause British Pound appreciated against US dollar with depreciation of
US dollar at similar time. Furthermore, the 2016 UK referendum also caused major decrease in
British Pound against US dollar as future of the international trade relations as well as domestic
political leadership was a bit unclear.

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Figure 1: Exchange rate of British Pound to US dollar
PART C: Analysis of a Recent Article on Bonds and Stocks
Reflective Summary of the Article
“The lead-lag relation between the stock and the bond markets” by Tolikas (2017), is an
article examining the relationship between stock and bond markets. The article examines relative
informational efficiency on the bonds as well as the fundamental stocks via lead-lag relation in
between their everyday yields. It is found that stock yields lead proceeds of the high yielding
bonds but not the venture score bonds that shows that stock markets are significantly more
informational resourceful in comparison to bond markets. According to the author, difference in
level of the informational productivity within these two markets might be as a result of the
different types of the investors prevailing within these markets and different informational
surroundings. For instance, bond market is said to be controlled by stylish or complex

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established investors that have quick access to appropriate info than the distinct investors who
have the tendency of preferring stock markets. Hence, established investors are found to include
significant info quickly in comparison to distinct investors that means that bond market has to be
more informationally resourceful in comparison to all stock markets. The result designates that
stock markets are comparatively more resourceful in relation to bond markets in integrating the
common information. Nonetheless, the author established that relative efficiency of stock and
bond markets differs with creditworthiness of bond portfolio being assessed. Furthermore,
normal market lead interval for imminent defaults linked with variance and means of the stocks
are found to be longer in comparison to the market lead interval for the bonds. Existence of such
lead time means that bond owners have relatively sufficient time in dodging from their long-run
positions in probably non-payment bonds or in devising hedging tactics to defend or guard worth
of their venture in the markets.
Summary on How the Article Contribute to My Understanding on the Topic Bonds or
Stocks
The article has contributed significantly to my understanding on Bonds and Stocks. In
essence, through the article, I now understand the different between stocks and bonds and the
relations these two concepts have in the economy. Besides, the article is very helpful since by
assessing structural changes in the two markets, I can be able to define at what time bond and
stock markets observe imminent evasion of an organization. Furthermore, it assist me
understanding the relationship that exist between stock and bonds whereby in understand that in
case the stock market lead interval is longer than the bonds market lead interval, investors may
have sufficient time in protecting their capital by disposing all the dangerous bonds preceding
their evasion or reduction in value. In addition, since stocks as well as bonds are said to

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represent entitlements on similar commercial assets, the article helped me to understand that in
stable markets, all information which is significant to the market value has to contemporaneously
upset their yields. From the article, I now understand the essence of how stock yields have
prognostic control over the future bond yields which is attributed by stock market being more
proficient than bond markets.

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References
Brookings (2018), Is inflation dead? Development Seminar challenges conventional wisdom on
declining inflation prices; Retrieved at 20th April 2018 from:
https://www.brookings.edu/blog/up-front/2018/04/18/is-inflation-dead-development-
seminar-challenges-conventional-wisdom-on-declining-inflation-prices/
Capital Business. (2018). Higher interest rates, loans lift Bank of America profits; Retrieved at
20th April 2018 from: https://www.capitalfm.co.ke/business/2018/04/higher-interest-rates-
loans-lift-bank-america-profits/
Exchange Rates (2018). British Pound (GBP) to US Dollar (USD) History 30 Day Graph;
Retrieved at 20th April 2018 from: https://www.exchangerates.org.uk/GBP-USD-history-30-
day-graph.html
Express (2018), Carney warns interest rates will INCREASE in bid to control inflation;
Retrieved at 20th April 2018 from: https://www.express.co.uk/finance/city/922249/BoE-
Mark-Carney-inflation-interest-rates-wage-growth-Treasury-Select-Committee
Financial Times (2017), Nobody seems to know why there’s no US inflation; Retrieved at 20th
April 2018 from: https://www.ft.com/content/bad8bfa4-9a2f-11e7-b83c-9588e51488a0
Financial Times (2018), US inflation: five things to watch; Retrieved at 20th April 2018 from:
https://www.ft.com/content/7503afc2-10f2-11e8-8cb6-b9ccc4c4dbbb
New York Times (2017), US inflation remains low, and that’s a problem; Retrieved at 20th April
2018 from: https://www.nytimes.com/2017/07/24/us/politics/us-inflation-remains-low-
and-thats-a-problem.html
Pound Sterling Live.com (2018), British Pound to US Dollar Spot Exchange Rates for 2017 from
the Bank of England; Retrieved at 20th April 2018 from:

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https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-
rates/gbp/GBP-to-USD-2017#charts
The Economist (2018), Automation will drive interest rates higher, a new report concludes;
Retrieved at 20th April 2018 from: https://www.economist.com/news/finance-and-
economics/21737505-rates-rise-stress-levels-will-too-automation-will-drive-interest-
rates-higher
Tolikas, K. (2017). The lead-lag relation between the stock and the bond markets. The European
Journal of Finance, 1-21