The interest rate is the cost of borrowing money, or the reward for saving money in a bank.
The interest rate for an economy is usually decided by a central bank. This then affects the interest rate which commercial banks offer to their customers for borrowing or saving money.
The interest rate is a key monetary policy tool which is used by governments to control the level of spending in the economy.
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Key terms:
Central bank – the financial institution which is responsible for maintaining a country’s currency and managing monetary policy.
To loan – when money is given by one party to another party with the promise of repayment with interest.
To borrow – when money is taken by one party from another party with the promise of repayment with interest.