Interest rate (percent rate)
What is the interest rate?
Interest rate (percent rate) - interest charged by the lender for the use of borrowed funds. The calculation period of the rate varies and is set separately in the contract, usually a month, a quarter or a year.
What are the interest rates?
There are interest rates of the Central Bank, lending operations of credit institutions with non-banking customers, yields of securities (e.g., bonds), etc.
Interest rate can be real, i.e. cleared of inflation, or nominal, which takes into account the amount of inflation.
There are also fixed interest ratesThe latter, for example, include interest rates that do not change throughout the contract, and floating interest rates that are revised once every certain period. The latter, for example, include LIBOR interest rate (London Interbank Offered Rate).
What affects the interest rate in the economy?
Interest rate levelThe interest rate set by the Central Bank is an important indicator of the economic stability of the country, because it is an instrument of monetary policy. The higher the interest rate, the greater the investment interest of foreign depositors and their contributions to the national economy. For the domestic economy, a high rate means a reduction in the amount of credit, which is not always good for development, but it slows down inflationary processes.
How do interest rates affect the market ?
The difference between interest rates of central banks (interest rate differential) plays a key role in the formation of the exchange rate. An increase in the interest rate is regarded by investors as an opportunity for risk-free income and causes an increased demand for the national currency. A lower rate, on the contrary, causes an outflow of capital from the national economy and, as a consequence, weakens the national currency.
For example, at the end of 2015, the Fed interest rate is 0.25% with the prospect of an increase, and the ECB interest rate is 0.05% with the prospect of further easing of monetary policy, which caused the EUR/USD currency pair to fall for a long time.
Depending on the characteristics of the state economy, the Central Bank, by changing the level of the interest rate, performs the functions of regulating inflation, deflation, supporting or slowing down economic growth.
Results Central Bank meetings on monetary policyThe economic calendar events, where decisions are made on the size of the interest rate, are the most important events in the economic calendar and cause increased volatility in the relevant currency pairs.