The first question to address is “what is an interest rate?” Interest rates are the cost of borrowing money or in another perspective; it is the compensation you receive for the service of lending money. If it were not interest rates, people would refuse to lend let alone save their money, both which requires postponing spending it on the present.
Because of their ever changing nature, countries tend to lower their interest rates. Listed below are factors that determine Interest Rates.
Supply and Demand
An ever present factor in the world of economics, supply and demand is one major factor that affects how interest rates move. Generally, if credits experience an increase in demand, interest rates will simultaneously rise and vice versa. On the other hand, an increase in the supply for credits will decrease their interest rates and vice versa.
Another factor that has an effect on the level of interest rates, the higher the inflation rate, the higher the likelihood interest rates will rise and vice versa. The reason behind this occurrence is because lenders tend to demand for higher interest rates in order to compensate for the decrease in power of purchasing the money that will return to them in the future.
The government has the power to dictate how interest rates are affected. An example of this would be the Federal Reserve of the United States that often announces how monetary policies will affect interest rates.
To wrap things up, interest rates play a major role in determining the amount of income you can earn by lending money, of bond pricing, and the amount of money you will need to pay when borrowing money. It is important to understand how interest rates change, with the primary factor being supply and demand followed by the other aforementioned factors listed above.