The concept of interest rate is directly related to the value of money. In this sense, it is the amount or amount of money that is related to an economic operation. Thus, if someone deposits an amount x in a bank, the interest rate is the percentage of money that they receive in return and if someone requests a loan to buy something, it refers to the amount that the debtor must pay to the bank.
An individual, a company or a government may need money and for this they request a loan, which is subject to a certain interest, which is the cost that must be paid to receive the requested money (the cost of money is precisely the rate of interest).
Interest rates affect the economy as a whole
The decision to raise or lower interest rates is normally made by the central banks of each country. Central banks determine a specific rate to lend money to different national banks and, consequently, the less national banks pay for the money they request, the lower the amount they charge their customers. As is logical, this circumstance has effects on the entire economy (the use of credit cards, mortgages or the request for credits to purchase goods, among other financial circumstances).
As a general guideline, when interest rates are low there are usually two consequences: Stock prices go up and prices in the construction sector go up as well. On the other hand, the fall in interest rates is associated with the devaluation of some currencies, especially the dollar.
Why are interest rates falling?
Economists consider that in the economy as a whole there is a decrease in interest rates for two fundamental reasons:
1) because price levels, inflation, tend to fall and
2) because there is a generalized economic slowdown and, as a consequence, it seeks to stimulate the economy by reducing interest rates.
Conversely, when there is an economic boom, central banks raise the price of money to cushion said growth.
Interest rates can also be negative
Let's imagine that a citizen deposits his money in a bank and the bank not only does not pay him any interest for it in return, but the citizen is the one who has to pay a fee for depositing his money. This simple example illustrates the concept of negative interest rate, a circumstance that begins to occur in some countries to discourage saving and promote investment and consumption.
Photos: Fotolia - wittaya / jaaakworks
