Interest Rate Determination

Interest rates are primarily determined by the interaction of supply and demand for money in the economy. When demand for loans is high, interest rates tend to rise, as lenders require more compensation for the increased risk. Conversely, if there is a surplus of funds or lower demand, rates may decrease. Central banks influence rates through monetary policy, adjusting them to control inflation and stabilize the economy. Factors like inflation expectations, economic growth, and external conditions also play significant roles in shaping interest rates. Ultimately, they reflect the cost of borrowing money and the reward for saving.