Interest is an important factor in finance and refers to the price a borrower has to pay for the use of capital.
A lender provides capital and usually charges an interest rate as remuneration. The interest rate depends on various factors, such as the credit period, the creditworthiness of the borrower, the general interest rate level or the type of loan.
The level of the interest rate influences the demand for and supply of credit. If interest rates fall, the demand for credit usually increases because loans become cheaper and more people or companies are able to afford loans. If interest rates rise, the demand for credit usually falls because credit becomes more expensive and fewer people or businesses are able to afford credit.
The level of interest rates is determined by various factors. One important factor is the monetary policy of the central banks. Central banks influence the level of interest rates by controlling the supply and demand for money. For example, by lowering the key interest rate, the central bank increases the money supply to stimulate the economy and increase inflation.
There are different interest rates in the financial world. Some of the most important interest rates are the money or repo rate, the interbank rate or the base rate. The money or repo rate is the interest rate at which banks lend money to each other. The interbank rate is the interest rate at which banks lend money to each other to conduct their daily business. The base rate is the interest rate at which central banks lend money to banks or borrow money from banks.
