Among the instruments through which the state is able to influence economic indicators and the world currency market, the interest rates of the central banks of a particular country stand out. Central banks independently determine the size of the interest rate and the time frame within which it can be revised.
Central bank interest rates are a powerful economic indicator and an effective lever of influence on the economy. This indicator is important for the management of both domestic and foreign policy. Its change affects the exchange rate, allowing it to be maintained at the required level.
The Central Bank's interest rate, which is also called the refinancing rate, is the percentage at which the country's main bank provides loans to other credit institutions, including commercial banks. At its core, the interest rate is an indicator for the economy, a benchmark for the value of the national currency.
The level of the specified percentage is determined primarily by the demand for funds and the number of offers on the market for loans and loan capital. The size of this indicator is also influenced by credit risks, the expected inflation rate, the dynamics of the exchange rate, and the level of taxes. The interest rate is set by a special commission from the central bank.
By participating in the refinancing of commercial banks, the central bank, through the change in interest, affects a number of economic indicators, including the inflation rate and the exchange rate. The higher the interest, the more expensive the loan received by a commercial bank, and, accordingly, the higher the interest on loans provided to customers.
The refinancing rate is widely used for calculating taxation, when determining the amount of penalties for late payment of fees and taxes. The rates on government obligations and the level of profitability of most financial instruments directly depend on the chosen level of interest rate. A change in the refinancing rate may lead to an increase or decrease in capital in the domestic market of the country.
The central bank is raising the interest rate in an effort to prevent the economy from overheating. This phenomenon is observed when there is an increase in the prices of goods without an increase in real production, in other words, when inflation spins up. Another reason to raise the refinancing rate is the need to make the national currency more attractive to potential investors. Thus, raising interest increases the value of the national currency and knocks down the inflation rate.
An increase in the central bank's interest rate also has a downside, since at the same time the rate of lending to enterprises rises, which entails massive reductions, leads to an increase in unemployment, and increases the mass of money in circulation.
With a decrease in the refinancing rate, the opposite effect is observed: investors seek to transfer funds to another currency, unemployment decreases, low borrowing rates lead to an increase in the real production of goods and services. General business activity is on the rise, although inflation is starting to rise.
Market participants need to correctly understand the meaning and procedure for the formation of interest rates, as well as keep track of the dates of the next meetings of the central bank commission, at which the issues of changing the refinancing rate are resolved.
