Perhaps no other indicator of the economy plays such a significant role in assessing the dynamics of foreign exchange markets as the interest rate. The difference in interest rates on currencies, 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.
Interest rate concept
Begin by defining the concept of "percentage." The interest is the share of profit that the lender receives from the borrower for the money capital taken on a 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 in accordance with the specific 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 interest rate contributes either to the outflow or inflow of money capital to the domestic market. Mobility of money capital is quite high, and their movement between national money markets reflect interest rates. Interest arbitration is a technical tool to align different national interest rates. Such cash flows are affected not only by percentage arbitrage, but also currency fluctuations.
According to classical concepts, the interest rate changes 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 influence of the state 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 value of interest rates:
The interest rates set by the Central Bank are an important tool by which foreign and domestic policies are implemented . The basis of money market rates is the discount rate or current interest rates on 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 many different types of interest rates. First, directly adjustable 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 the context of inflation, serious differences appear between such concepts as the real and nominal interest rates. Under the nominal interest rate is understood such, in the calculation of which inflation was not taken into account. When deciding on the use of credit funds, it is the real interest rate that plays an important role.
Also, interest rates are differentiated by structure and role into basic and secondary, by transaction terms - into long-term and short-term ones. The interest rate can be floating and fixed, that is, unchanged. Floating interest rates are set for both deposit and credit operations. 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 market situation, and the bank can protect itself from the growth of interest rates on loans in the future.