Simply put, an interest rate is the price that comes with loaning money. On the flip side, it is the payment for the service and risk of lending money. People are less willing to lend or save capital without it as both calls for putting off the chance to spend at the present time. Interest rates change along with the times and for lenders and borrowers, it is essential to comprehend the reasons for these changes. Of course, we can’t talk about lowering rates without talking about how these factors increase them.
The country’s central bank is in control of the supply of currency in the economy with the help of its monetary policy. The monetary policy of a country considers the factors below before making any changes.
Supply and Demand
Interest rates change merely by the supply and demand of credit: an increase in the demand for credit will increase interest rates and at the same time, if there is a decrease in credit demand the interest rate will lower. Contrariwise, a decrease in the supply will increase interest rates while an increase in supply of credit will decrease interest rates.
Gross Domestic Product
The gross domestic product of a country can have an influence in the prevailing interest rate. GDP is often used to gauge the wealth of a country and how fast it is growing. Depending on the results the central banks of the country may adjust the interest rates up or down.
Countries look at their gathered statistics for a view of the nation’s employment rate. A lower number of unemployment may suggest a stronger economy thus making the country’s central bank to raise the interest rate and a higher number of unemployment may suggest a weaker economy that may not be able to handle an increase in interest rate so the country’s central bank may choose to lower it.