Interest rate: features and types of interest rates

Perhaps no other indicator of the economy plays such a significant role in assessing the dynamics of currency markets as an interest rate. The difference in interest rates by currencies, that is, the percentage differential, is the main factor determining the relative attractiveness of the two currencies and, accordingly, the possible demand for each currency. There are several types of interest rates in the money market that are linked.

The concept of interest rate

It begins with the definition of the term "percentage". The interest represents the share of the profit that the lender receives from the borrower for the money capital taken on loan. The source of interest is the surplus value that is created as a result of the use of loan capital.

The interest rate is determined according to the specific conditions for the use of loan capitals, and is also subject to credit and monetary regulation by the Central Bank. At the same time, the size of the interest rate promotes either an outflow or an inflow of money capital into the domestic market. The mobility of monetary capital is quite high, and their movement between national money markets reflects interest rates. Interest arbitrage is a technical tool that allows to equalize various national interest rates. Such a cash flow is influenced not only by interest arbitrage, but also by currency fluctuations.

According to the classical ideas, the interest rate varies due to the impact of the rate of return. Actually, the level of interest rates is set spontaneously and is determined by supply and demand. In turn, supply and demand are determined by a large number of factors, including the degree of state influence on the economy, the phase of economic development, external factors, the policy of the Central Bank, and so on.

There are other factors that affect the amount of interest rates:

• Taxes;

• Credit risks ;

• The expected level of inflation;

• The movement of exchange rates and so on.

The interest rates set by the Central Bank are an important tool through which foreign and domestic policies are implemented . The basis of rates in the money market is the discount rate or current interest rates on the operations of the Central Bank. Commercial banks, setting interest rates, are guided by the rates of the Central Bank of their country.

Types of interest rates

In the banking sector, many different types of interest rates are used. First, directly adjustable interest rates. Secondly, market interest rates, divided into banking and auction.

Interest rates on loans and deposits are divided into interest rates on loans to individuals and legal entities, non-insiders and insiders.

In the conditions of inflation, there are serious differences between such concepts as the real and nominal interest rate. Under a nominal interest rate understand this, in the calculation of which did not take into account inflation. When deciding on the use of credit funds, it is the real interest rate that plays an important role.

Also, interest rates are differentiated in structure and role in the basic and secondary, the terms of the transaction - for long-term and short-term. The interest rate can be floating and fixed, that is, unchanged. Floating interest rates are set for both deposit and credit transactions. They are necessary to compensate losses of the depositor and the bank. Their use allows the depositor to guarantee an increase in revenues according to the market situation, and the bank helps protect itself against the growth of interest rates on loans in the future.