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Interest Rates

Interest rates represent the cost of borrowing money or the return earned on savings or investments. It is expressed as a percentage of the principal. Central banks set key interest rates, influencing economic activity by adjusting the cost of borrowing. Higher interest rates tend to slow down economic growth by making loans more expensive, while lower rates encourage borrowing and investment. Interest rates impact everything from mortgages and consumer loans to corporate finance and bond yields.

Example

When the Federal Reserve increases interest rates, borrowing becomes more expensive, leading to reduced consumer spending and business investment.

Key points

• Represents the cost of borrowing or return on investment, expressed as a percentage.

• Central banks adjust rates to influence economic activity.

• Impacts mortgages, loans, savings, and bond yields.

Quick Answers to Curious Questions

Higher rates discourage borrowing and spending, slowing economic growth, while lower rates encourage borrowing and investment, stimulating the economy.

Central banks set key interest rates to control inflation, manage economic growth, and stabilize financial markets.

Higher interest rates increase the cost of loans and mortgages, making borrowing more expensive, while lower rates reduce borrowing costs.