How do I gauge the trend of interest rate?

Question: How do I gauge the trend of interest rate?

Generally, the central bank of a country uses interest rates to control inflation. Therefore, an understanding of interest rate trend is important since it invariably affects the stock market.

Basically, the trend of interest rates tend to depend on several factors.

One of the more important factors concerns the growth of money supply, that is, by comparing M3 with the economic growth which is that of Gross Domestic Product (GDP).


Illustration.

Country "A" (Broad Money Supply M3) Year 1993

*Broad money supply (M3) = A + B + C = $38.3bn
Annual % change in M3 = 24%

GDP (Rate of expansion) = 12.6%

Base Lending Rate (BLR) Current = 7.1% - 7.25%

Conclusion: The economy is facing high risks of inflation as the M3 growth rate of 24% is twice as fast as the rate of expansion which is 12.6% in nominal GDP.

Possible Action: As there is likely to be a surge in inflation in the immediate future, an increase in the BLR to 8.5% is a possible move in order to bring M3 growth rate back to about 15%.

Effect: Interest rate in Country "A" could be on the rise.


_____________

*Broad Money Supply (M3) = A+B+C
The Determinants are:......................... 1993......... % change

A. Net Lending to Government..........1.6bn........-1.0%

B. Private Sector Credit Demand........18.1bn......11.3%
Manufacturing...................2bn....+1.2%
Construction....................1.3bn....0.8%
Commerce.......................1.8bn....1.0%
Transport........................2.2bn....1.4%
Other Business...............1.0bn....0.7%
Personal...........................9.8bn...6.2%

C. External Liquidity.........................21bn......13.7%
Traders & Income
Repatriation........-5.4bn....-6.0%
Investments..................11.7bn....8.4%
Short Term Funds........15.5bn...11.3%


Ref: Making Mistakes in the Stock Market by Wong Yee