Theory of economics

Interest rates. There are arguments for interest rates as both leading and lagging. They are lagging in the sense that the decision to increase or decrease rates is made by central banks after an economic event or market movement has already occurred. However, they are also leading because once the decision has been made, there is a significant likelihood of the economy changing to reflect the new rate.

For example, during periods of health, when there is high consumer spending and high rates of inflation, central banks can be expected to raise interest rates to stop the economy growing too quickly. This decision confirms growth. However, the new rates mean that banks will have to pay a higher rate to obtain money, they will in turn increase the cost of borrowing for consumers. This makes consumers more reluctant to borrow money and discourages spending. The decisions made by central banks will have a significant knock-on effect to banks, consumers and business all around the world.

Learn more about the effects of rising interest rates. On the other hand, if the economy is stagnant, analysts will expect central banks to lower interest rates to boost spending. The decision confirms the economic situation is gloomy but is an indication that the cost of borrowing will soon go down, spending will increase, and the economy will start to grow.

Lagging indicators:

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  GDP growth rates
  
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  The Consumer Price Index (CPI) and inflation
  
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  Currency strength and stability
  
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  Labour market statistics
  
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  Commodity prices