One of the strongest indicators in the economy is the Central Bank's interest rate. It is necessary for the competent management of both domestic and foreign economic policy.
What is the Central Bank Interest Rate
The Central Bank's interest rate is also called the refinancing rate or official discount rate. The interest rate should not be confused with the key rate. Many people draw erroneous conclusions based on the fact that both of these indicators have been equalized since January 1, 2016.
The Central Bank's interest rate is the percentage charged to commercial banks or other credit institutions for providing borrowed funds. The main functions of the refinancing rate are:
- Economic regulation.
- Taxes on income from deposits.
- Calculation of fines to the employer for the expired payment of salaries to employees.
- Calculation of penalties for unpaid taxes and fees.
The interest rate first appeared in 1992. But then its name sounded somewhat different. In a telegram dated April 10, 1992, the name of the rate sounded like “discount rate on centralized credit resources”. But already on May 22 of the same year, the name of the rate became modern.
The Central Bank determines the level of the refinancing rate based on:
- Loan market needs.
- Number of sentences.
- Risks.
- The estimated inflation rate.
- The direction of the exchange rate.
- Taxes
In addition to the main reasons for determining the interest rate, there are many other factors that can change the decision.
Why it is important to know about changes in interest rates
Only a certain commission of the Central Bank can set the refinancing rate. As a result, the percentage that ordinary citizens who have taken money from a commercial bank will pay directly depends on this indicator. Thus, it turns out that if the Central Bank increases the interest rate, then in order for the commercial bank to pay off the debt and go into profit, it must set the rate for the persons it serves even higher than the refinancing rate. In the event of a decrease in the interest rate, credit organizations also reduce interest on loans.
It is worth noting that if the rate rises, then there are 2 reasons for this:
- Increasing the attractiveness of the national currency. As a result of the increase in the refinancing rate in the Forex market, the currency is growing. Banks are able to place money allocated by investors on deposits at a higher interest rate.
- Reducing inflation in the country. Due to the interest rate, price increases are not allowed without an increase in production.
But in addition to the positive aspects, the increase in the refinancing rate has a significant disadvantage: as a result of the increase in the interest rate, business lending is getting more and more expensive. As a result, there are reductions in organizations, and unemployment appears in the country. In addition, the amount of money in circulation is increasing.
When the interest rate goes down, the exact opposite effect occurs. It is easier for businesses to take credit, but inflation in the country is increasing and the currency is becoming unsightly for investors.
That is why for the correct determination of the interest rate, the maximum collection of important information and competent planning are required.
