Business
Interest Rates Explained
Discover what interest rates are, how they are set by central banks, and their direct impact on borrowing, saving, and the overall economy.
What is it?
An interest rate is the percentage charged for borrowing money or earned for saving it. For borrowers, it's the cost of a loan (e.g., mortgages, credit cards). For savers, it's the return on deposits. Central banks, like the U.S. Federal Reserve, set a key policy rate that influences all other rates in the economy. This rate is a primary tool for managing inflation and employment, making it fundamental to economic health.
Why is it trending?
Interest rates are a major news topic because central banks worldwide are adjusting them to combat high inflation. By raising rates—a process called monetary tightening—they aim to make borrowing more expensive, thus slowing down spending and cooling the economy. These policy decisions have significant ripple effects on global financial markets, businesses, and future economic growth, which is why every central bank meeting is closely watched.
How does it affect people?
Rate changes directly impact your wallet. Higher rates mean more expensive loans for homes and cars, which can strain household budgets. On the other hand, they boost the earnings on savings accounts. Lower rates make borrowing cheaper, encouraging spending, but offer minimal returns for savers. These fluctuations influence major financial decisions, affecting personal wealth and the cost of living for everyone.