In everyday life, every person or business often faces such a question as lending or saving their free funds on bank deposit (deposit).
The basis for making a decision on lending or investing funds is the size of the bank interest rate – the price of money of a certain currency.
What is it, the bank interest rate, and how does it affect monetary and settlement relations between individuals, business entities and the economy as a whole?
The price of funds (interest rate) is determined directly by the commercial bank itself, based on the level of the rate at which its liquidity is provided by the main authorized body of the state - the regulator that controls monetary settlement operations in the country (National, Central Bank or Federal Reserve System).
This rate at which the regulator provides loans to commercial banks is called the discount (key) rate or the refinancing rate.
In other words, the bank buys money from the regulator (Central Bank), throws its margin on this price and sells them to end consumers in the form of loans issued.
Thus, the interest rate of the loan for the population and the real sector includes the price of the money of the regulator (Central Bank) + the margin (margin) of the commercial bank itself (CB).
The formula of the bank interest rate(BPC):
BPC = Discount rate + KB Margin
On average, the margin of a commercial bank can be from 2 to 5%. At the same time, the price of the bank's deposits (accepted funds for storage) will be 2-4% points lower than the cost of their loans, which, in fact, determines the natural commercial benefit of the bank from its activities. That is, it takes cheaper from customers, sells more expensive.
For example, a commercial bank took a loan from the National Bank at 7%. He issues his loans under 12 % (7 % + 5 %), and accepts deposits under 9 % (12 % - 3 %).
The entire pricing policy of a commercial bank also depends a lot on the structure, volume, timing, risks of its assets (loans) and liabilities (deposits), which may affect the final cost of individual transactions with its customers.
Banks are more interested in increasing their profits by increasing the volume of credit services, rather than the size of their margin on the value of money. Therefore, the growth of the bank interest rate is mainly due to an increase in the key discount rate of the regulator, and not the margin of a commercial bank in it. And the change in the discount rate itself directly depends on the level of inflation, the monetary unit for which it is set.
The higher the inflation rate, the higher the bank interest rates.
The regulation of the discount rate is the main function of the regulator on which the economic stability of the state depends.
In case of an increase in inflationary processes (price growth), the regulator raises the key rate, which indicates a tightening of the monetary policy of the state. That is, the discount rate becomes high, which means that the rates on loans issued by commercial banks increase. This situation encourages the population not to spend money, but to save it. With expensive loans, the population and the real sector are not interested in attracting them and spending money naturally. Due to the policy of high rates, economic processes in the country are slowing down, commodity-money turnover in the economy is falling, which leads to lower prices and, as a consequence, lower inflation.
In the conditions of a slow economy and stabilization of the price level, the regulator begins to reduce the discount rate, already to stimulate demand for money and its spending. The policy of cheap loans, in turn, leads to a "warming up" of the economy. The opposite is already happening, the population is beginning to actively attract loans and thereby stimulate the economic growth of the real sector.
That is, the regulator must constantly find a point of equilibrium of the discount rate level to balance effective demand, support the economic health of the real sector and state stability.
The bank interest rate is the mechanism of formation and influence on the economy - Something like that!
