How are bank interest rates governed?

How are bank interest rates governed?


This might be a tough question to address since policies surrounding the governing of bank interest rates are usually controlled by the Central Bank in each country. They usually have regulations based on the country’s economic strength.  In the United States, the interest rates have both federal and state regulations, making it pretty fragmented, as compared to most countries which are pretty centralized.

The central bank of a country has many ways of controlling interest rates.  The initial step in doing so is by creating policies that ensure liquidity for the country through stable prices.  The central bank then will manipulate the money supply through retail banks.  It adjusts the interest rates depending on the bank’s need to keep money flowing.

If the central bank’s monetary policy makers want to increase money supply, they will decrease the interest rate, therefore, making it more attractive for financial institutions to lend and borrow money. On the other hand, if the money supply needs to be reduced, then interests are raised in such a way that more funds are deposited and fewer loans are requested of the central bank.

Some economists argue that the governing of interest rates is not about the rates themselves but it is about the money. 

Other factors that determine interest rates or that compel central banks to make adjustments include:

  • Inflation - Lenders will usually require higher interest rates to compensate for potential losses in the future when money has decreased in power.
  • Supply and demand - The concept here is rather easy. When you open a bank account, for instance, you are actually lending your money to the bank.  They will pay you an interest for this.  With this, they keep the rights to use your money for investment and banking activities, meaning that the bank is lending your money to other customers.  The available credit then depends on the amount of money banks can lend. On the other hand, if you decide to pay your credit card for this month until next, the amount of market money available decreases, plus your interests increase.

Featured Posts

Ottawa Wants To Invite Chinese Students, Tourists and Workers to Canada

Canada is soon set to receive up to twice the number of the Chinese tourists, students, workers, and travelers. Currently, there are a paltry five visa offices in China, but the number is set to triple over the next couple of months. These centers will be located in Chengdu, Nanjing, Wuhan, Jinan,…

Chinese Development Bank Approves First Loans

The outcome of Britain’s referendum that was held last week is expected to have an impact on the world economy in the coming days. Nonetheless, Asian Infrastructure Investment Bank, a Chinese based development bank, started to offer loans to clients on June 24th. The management team stated…

New Jersey Family Wins $429.6 Powerball

The Powerball has just made a 70-year-old woman, Perlie Smith, $429.6 million richer. On May 13, 2016, Ms. Smith was identified as the Powerball jackpot winner. She has seven children, of whom Valerie Arthur is the eldest. Arthur just retired as a prison administrator for the Department of…

Saudi Arabia wants to buy more US refineries

Saudi Arabia is one of the most controversial, but richest countries on the planet. The country developed quickly immediately after discovering oil. Now they are providing fuel for many countries. The producers in Saudi Arabia also want to expand their business by buying more US refineries. Why now?…

What is a mutual fund?

When it comes to your money, it is very important to be informed. You have to know exactly how to manage your funds and how you can use your money to increase your income. It is very tempting to risk everything you have and hope for the best, but it is really not a good idea? What is the best way to…

What is a reverse mortgage?

Homeowners who are 62 or older can access money based on the value of their mortgage-free home. It is another word for a loan but it doesn’t have to be repaid until you sell your home or move. A reverse mortgage means that you receive a certain amount of money that you can use to help your…