683: Interest Rates

In central banks around the world, setting and adjusting interest rates serves as one of the primary methods of impacting how money flows around their economies. Those interest rates don’t directly impact the interest rates that consumers pay or receive, but the impact does eventually flow down to the cost of money.

But – the cost of money? What the heck does that even mean?

Modern monetary systems and financial institutions work on a basic principle — that money is deposited into accounts, and the financial institution pays the people who keep money there a percentage as an incentive to keep the money there. Then the institution turns around and lends the money out, charging a higher interest rate then they’re paying out in order to help pay the costs of operation.

The central bank interest rates are the cost that the main national institution charges all of the banks and credit unions to lend money out to them — which impacts the rates that they’re willing to or have to charge their customers or members.

But even if you aren’t saving money or planning on borrowing money, interest rates still impact you. Interest rates end up impacting things like how difficult or expensive it is to rent an apartment or buy a home, the exchange rate of one currency to another, and even the cost of national debt incurred in the name of a country’s citizens.

This is all on the macro level, though. On the smaller personal level, interest rates may have less to do with your everyday choices than your personal financial situation.