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?

What are Forex Reserves? Why is it important?

What are Forex Reserves?

Forex reserves are money or other assets held by a central bank or other monetary authority so that it can pay its liabilities if needed, such as the currency issued by the central bank, as well as the various bank reserves deposited with the central bank by the government and other financial institutions.


Why Forex Reserves are important for a Country?

1. It increases the confidence in the monetary and exchange rate policies of the government.

2. It enhances the capacity of the central bank of the country to intervene in the foreign exchange market and control any adverse movement and stabilize the foreign exchange rates to provide a more favorable economic environment for the progress of the country.

3. During the time of any crisis, foreign exchange reserves come to the rescue of any country so as to absorb the distress related to such a crisis.

4. It also adds to the comfort of market participants that domestic currency is backed by external assets and hence it also helps the equity markets of the country because due to strong reserves many people from foreign countries are willing to invest in the country having strong foreign exchange reserves.

What affects the country due to forex reserves?

The accumulation of reserves might induce two types of crisis:
First, it might lead to over-borrowing and overinvestment in the reserve currency country and cause a financial crisis when expectations worsen or the reserve accumulation ends.

Second, by steadily worsening the net foreign asset position of the reserve currency country, it might result in a currency crisis where the reserve currency country deliberately decides to devalue its currency.

List of top 10 countries with highest forex reserves:

Rank Country Foreign Currency Reserves (in billions of U.S. dollars)
1 China $3,210.00
2 Japan $1,259.30
3 Switzerland $804.30
4 Saudi Arabia $501.30
5 Russia $460.60
6 Taiwan $459.90
7 Hong Kong $424.80
8 India $403.70
9 South Korea $402.40
10 Brazil $379.40

 

List of top 10 countries with lowest forex reserves:

Rank Country Foreign and Gold Reserves (thousands of USD)
1 Sao Tome and Principe 63,520
2 Micronesia 75,060
3 Dominica 103,000
4 Samoa 140,700
5 Saint Vincent and the Grenadines 157,400
6 Tonga 158,800
7 The Gambia 159,300
8 Sudan 181,500
9 Vanuatu 184,000
10 Eritrea 218,900