Interestrate

An interest rate is the cost of borrowing money or the return to lending money, expressed as a percentage of the principal over a given period. It serves as the price of money and is influenced by factors such as time, risk, inflation expectations, and liquidity. The nominal rate is the stated percentage, while the real rate adjusts for inflation, and the effective rate accounts for compounding.

Interest rates vary by instrument and term. Short-term rates apply to loans and deposits maturing within a year, while long-term rates apply to longer maturities. Rates can be fixed or floating, meaning they remain constant or change with market conditions. Lenders price in credit risk and liquidity, so borrowers with higher risk typically pay higher rates. Differences between nominal and real rates matter for understanding purchasing power over time.

Central banks influence general interest rates by setting policy rates and guiding monetary conditions, which in turn affect consumer and business lending. Market rates on loans, mortgages, and government securities reflect policy expectations, risk premia, and liquidity conditions. The term structure, or yield curve, shows rates across maturities and provides information about future rate expectations and macroeconomic outlook.

Interest rates shape economic activity and financial decisions. Higher real rates tend to dampen borrowing and curb inflation, while lower rates encourage spending, investment, and growth. They also affect savers, borrowers, investment valuations, and currency exchange. In financial markets, benchmark rates for government securities and reference rates for contracts (such as SOFR replacing LIBOR) provide the basis for pricing a wide range of financial products.