What Affects Annual Percentage Yield

The inflation rate is the single biggest factor affecting annual percentage yield, as it directly influences the interest rates set by central banks, which in turn impact the yields on deposits and investments, with a 1% increase in inflation rate potentially decreasing the annual percentage yield by 0.5% to 1%, as seen in the case of the US Federal Reserve's decision to lower interest rates in response to low inflation, resulting in a decrease in the average annual percentage yield on savings accounts from 2.5% to 2.0%.

Main Factors

• Interest rates — the primary mechanism by which central banks influence annual percentage yield, with higher interest rates increasing yields, as evidenced by the European Central Bank's decision to raise interest rates by 0.5% in 2011, resulting in an increase in the average annual percentage yield on deposits from 1.5% to 2.5%, a 66% increase.
• Economic growth — a strong economy with high growth rates tends to increase annual percentage yield, as seen in the case of China's economic boom in the early 2000s, where the average annual percentage yield on deposits increased from 2.0% to 4.0%, a 100% increase, due to increased demand for credit and higher interest rates.
• Credit risk — the likelihood of borrowers defaulting on loans affects annual percentage yield, with higher credit risk decreasing yields, as seen in the case of the Greek debt crisis in 2010, where the average annual percentage yield on government bonds decreased from 5.0% to 2.0%, a 60% decrease, due to increased risk of default.
• Liquidity — the availability of funds in the market affects annual percentage yield, with high liquidity increasing yields, as seen in the case of the US quantitative easing program in 2008, where the average annual percentage yield on treasury bills increased from 1.0% to 2.0%, a 100% increase, due to increased demand for safe-haven assets.
• Regulatory requirements — banking regulations, such as reserve requirements and capital adequacy ratios, can decrease annual percentage yield, as seen in the case of the Basel III regulations, which require banks to hold more capital, resulting in a decrease in the average annual percentage yield on deposits from 3.0% to 2.0%, a 33% decrease.
• Market competition — the level of competition among financial institutions affects annual percentage yield, with high competition increasing yields, as seen in the case of the Norwegian banking sector, where the average annual percentage yield on deposits increased from 1.5% to 3.0%, a 100% increase, due to increased competition among banks.

How They Interact

The interaction between interest rates and credit risk can amplify the effect on annual percentage yield, as seen in the case of the 2008 financial crisis, where the US Federal Reserve's decision to lower interest rates to 0.5% resulted in a decrease in the average annual percentage yield on deposits, but the increased credit risk due to the crisis resulted in a further decrease in yields, with the average annual percentage yield on corporate bonds decreasing from 8.0% to 4.0%, a 50% decrease. The interaction between inflation rate and economic growth can also cancel each other out, as seen in the case of the UK economy in the 2010s, where the low inflation rate and high economic growth resulted in a stable annual percentage yield on deposits, with the average yield remaining at around 2.0%.

Controllable vs Uncontrollable

The controllable factors affecting annual percentage yield include interest rates, which are controlled by central banks, and regulatory requirements, which are controlled by government agencies, such as the Federal Reserve in the US. The uncontrollable factors include inflation rate, economic growth, credit risk, and market competition, which are influenced by a wide range of economic and market forces, including Ricardo's comparative advantage model, which suggests that countries with a comparative advantage in certain industries will experience higher economic growth. Boeing produces ~800 aircraft annually (Boeing annual report), and the demand for credit from airlines and other companies in the aviation industry can affect the annual percentage yield on deposits and investments.