The interest rate is one of the ways to control the economy.
First for the HOW they are changed/set:
It is generally controlled by the central bank (BoE, Fed...) by either buying and selling of bonds, printing of money, reserve ratio setting, actual rate control.
Actual rate control refers to the central bank changing the rates it charges the commercial banks on short term loans it can make them. Therefore the commercial banks will follow suit. If your source of money costs more, then you will ask for more when you lend. Simple.
The reserve ratio is the % of the deposits a commercial bank keeps as reserves. Now if the reserve ratio falls, banks keep less in reserve, lend out more, therefore decrease interest rates so they can lend more.
Bonds are also simply. The Central Bank buys back bonds from the market when it wants to allow more money into circulation. It's similar to printing money. There is more of it. Therefore, the 'price' of money, that is the interest rate, falls. And vice versa.
Now for the WHY interest rates would change.
The Central Bank decides what rate should apply depending on its aims. If for example the economy is not doing very well and there is unemployment, then the central bank might want to lower interest rates so that businesses can borrow for cheaper and invest, bringing the economy back up.
On the other hand, if there is inflation caused by people buying more that what is produced, then the central bank might want to make it more expensive for people to borrow by increasing the interest rates.
Finally for the link between all interest rates:
All interest rates are linked. Like mentioned above, if the central bank's interest rate rises, then the potential cost to the commercial bank for the money it lends you and me goes up. To maintain its profits, the interest we pay goes up. And that applies whether I am having a mortgage, or borrowing to invest, or borrowing to buy myself a yacht (I can dream, can't I?). It's bascially that commercial banks need to keep a gap between their cost of funds and the returns.
Hope that simplistic answer helped.
2007-01-22 15:27:39
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answer #1
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answered by ekonomix 5
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A "base rate" can apply to a particular loan. For classes of loans, the base rate is typically the Prime Rate, which banks set as the rate at which they lend to their best customers on commerciall loans (although you can borrow below the prime rate) or, for commercial finance, something called LIBOR, which is the London Interbank Rate, akin to the Federal Funds Rate.
Many mortgages are based on either the 5-year or 10-year Treasury Note rate, which is the rate the Fed pays to borrow money for that period of time.
Rates do not all rise at the same time. Although rates are generally related to each other, and typically short-term rates are lower than long-term rates, since the long-term rate has to include a premium for uncertainty, the current rates in the US are unusual in that rates past 5 years are almost the same (a flat yield curve.) When the short term rates are higher than long-term rates, you get an "inverted" yield curve.
Rates for more risky things are higher; e.g., consumer rates for credit cards, which are typically used to pay for items quickly consumed, are 18+%, whereas your car loan may be as low as 6% (unsubsidized), because there's an actual car used for collateral, which the lender can repossess and sell to pay off the loan.
Hope this helps.
2007-01-22 09:11:46
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answer #2
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answered by Michael H 2
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The base rate is set by the Bank of England (the central bank) It is decided by the Monetary Policy Committee based on the current state of the economy (eg if there is a recession they will increase the interest rate to encourage more spending / investment). The Bank of England lends money to commercial ("normal") banks. An increase in the base rate makes it more expensive for them to borrow money form the central bank so they in turn raise their interest rate (offered to customers). This typically increases interest rates on mortgages, credit card interest rates etc. However this is good news if you save money as you receive more interest.
2007-01-22 09:10:57
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answer #3
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answered by Anonymous
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Its set by the Bank of England.
Other lenders will take note and adjust their rates sooner or later.
Depending how efficient or greedy or ruthless lenders are, they will arrive at a different level with respect to the base rate.
For example, a bank might lend money on relatively risky ventures - that might not succeed. They would probably charge a much higher interest rate, to account for some of their borrowers going insolvent and some succeeding.
2007-01-22 09:05:26
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answer #4
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answered by Anonymous
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In a nutshell interest is the cost of borrowing money.
2007-01-22 09:10:25
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answer #5
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answered by dwayne dibbley´s cat 2
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The credit crunch interior the U. S. become the properly results of the sub properly mortgage issues. about 4 years in the past US funding banks created an funding Bond utilising mortgages as its underlined protection. Or properly mortgage bonds. so as that they want to purchase mortgages from banks there and elsewhere to create more suitable bonds for investors to make investments interior the U. S. and round the international. initially due the housing boom and the robust housing market there those bonds were termed as AAA funding for investors. And as call for of the deepest loan bonds will develop through US,uk investors and the international all investors made revenue at the same time as the cost of the bond will develop. In previous due 2006, at the same time as the housing bubble burst, homestead expenditures drops appreciably and the housing market collapsed. mortgage debtors won't be able to pay off their funds of their mortgage and banks had to take foreclosure movements with a view to recuperate their loans to them. those funding bonds change into sub properly mortgage. The bonds also grew to change into valueless as investors paniced and began to unload their investments at any value and suffered heavy losses and some even loss each little thing. interior the united kingdom maximum banks also suffered wide losses because they offered the U. S. sub properly mortgage and had to do write downs. yet Northern Rock become right away in touch with the U. S. sub properly mortgage issues, because they offered their mortgages to those US funding banks for them to instruct them into bonds. It no longer purely ought to incured wide losses on those sub properly mortgages it also had to do its write downs. It had liquidity difficulty and at the same time as there turned right into a run on it through its purchasers they had to type help from the monetary corporation of britain with a view to pay off its depositors. The monetary corporation of britain had to bail it out and then nationalised it to ward off it from collapsing. it is all i study the count number, wish this help.
2016-10-15 23:02:55
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answer #6
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answered by ? 4
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interest rates are a per cert of the amount you owe so if it was 1 per cent of 100 pound you would pay back a pound
2007-01-22 09:08:10
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answer #7
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answered by wheels on the boat!!!!!11 1
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The Bank has a BIG POLE which the use to shaft you with.
2007-01-22 09:07:09
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answer #8
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answered by Anonymous
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a ripoff
2007-01-22 09:09:38
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answer #9
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answered by BEN W 1
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