INSTITUTIONS AND OTHER BACKGROUND INFORMATION

What are interest rates? How are they defined by central banks?

Interest rates are what central banks charge to their domestic banks to borrow money. Although central banks also use rates as a tool to stabilize the economy. Lower rates are meant to provide cheaper financial costs to banks that should be translated to businesses and are usually used to stimulate the economy, usually useful in the low inflation scenario. However, mounting inflationary pressures are usually seen as an indication of a booming economy and result in higher bank rates, to prevent inflation from running out of control. In the US, the Federal Reserve is in charge of the monetary policy.