How does the central bank determine interest rate? What is affected by the Central Bank interest rate?

What is Central Bank Interest Rate?

The levies applied on loans as an interest rate by Central Bank is called Central Bank Interest Rate. It is also known as the price of money that is borrowed or saved.

How it is determined?

The interest rates are determined by the following:
Reserves:

The interest rate is determined by the reserves held by the Central Bank to show their economic growth. If the reserves are down the economy is slowing down and therefore they raise the interest rate or else vice versa.

What is Interest Rate?

 

 

Inflation and Unemployment:

It is one of the key factors to decide the interest rate. The spending power of the people increases the interest rate will be increased to stablise the inflation and the job rate also determines to apply the interest rate. Increase in job number is good for economy.

What are the key factors for interest rate?

Bonds:

Bonds which gives a considerable yields will boost up the central bank to decide the interest rate.

Loans and Home Prices:

The banking industry providing the Loans for consumers which helps the consumers to purchase home, vehicles will also helps the central bank to decide the interest rate.

What are Bond Market?

What are affected by the central bank interest rate?
The commercial banks are the most affected by central bank interest rate. When central bank increases the interest rate, the commercial banks will tighten all types of loan by increasing the interest rate for loans. As the commercial banks increase the rate the consumers purchasing of homes and vehicles will go down and spending power of consumers will be reduced and therefore the business people will get affected. The consumer and business people are unable to repay their loans and so the commercial banks are affected. Because of these factors the economy is getting affected as there is no business and there is no spending by people. When business is affected the currency value and stock price will move down and the country will fell into crisis.

So, the central bank interest rate plays major role for a nations development.

Which determines the interest rate?

You Might Also Like
Leave a Reply