Question

If a bank manager is certain that interest rates were going to increase within the next six months, how should the bank manager adjust the bank’s maturity gap to take advantage of this anticipated increase? What if the manager believed rates would fall? Would your suggested adjustments be difficult or easy to achieve?

Answer 1

If the bank manager is anticipating the interest rates to hike, He should try and keep the repricing gap on the positive side. This will unable him to get the revised interest rates on both income and expense sides, which will in a way unable him to earn more.

However if he anticipates the interest rates to fall he should set repricing gap to negative position. In this case, interest income will fall less by interest expense. Thus a net increase in interest income.