Perhaps no other indicator of the economyplays such a significant role in assessing the dynamics of currency markets, as the interest rate. The difference in interest rates by currency, that is, the interest differential, is the main factor determining the relative attractiveness of the two currencies and, accordingly, the possible demand for each currency. In the money market there are several types of interest rates that are related to each other.
Concept of interest rate
We should start with the definition of the term “percentage”.The percentage is the share of the profit that the lender receives from the borrower for the money capital taken on the loan. The source of interest is the surplus value, which is created as a result of the use of loan capital.
The interest rate is determined according tospecific conditions for the use of loan capital, and is also subject to credit and monetary regulation by the Central Bank. At the same time, the size of the interest rate contributes to either an outflow or an inflow of money capital to the domestic market. The mobility of money capitals is quite high, and their movement between national money markets reflects interest rates. Interest arbitration is a technical tool that allows to level various national interest rates. Such a cash flow is affected not only by interest arbitrage, but also by currency fluctuations.
According to the classic ideas of interestthe rate changes due to the impact of the rate of return. In reality, 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 interest rates:
taxes;
credit risks;
expected rate of inflation;
movement of exchange rates and so on.
Interest rates set by the Central BankThey are an important tool by which foreign and domestic policies are implemented. The basis of rates in the money market is the discount rate or the 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
The banking sector uses manydifferent types of interest rates. First, directly regulated interest rates. Secondly, market interest rates, subdivided into bank 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 terms of inflation there are serious differences.between concepts such as real and nominal interest rates. Under the nominal interest rate understand this, 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 bythe structure and roles for base and minor, in 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 for the losses of the depositor and the bank. Their use allows the depositor to guarantee an increase in income according to the situation in the market, and the bank allows to protect itself from the growth of interest rates on loans in the future.
