3.2.3. Interest rate
Interest rate - the rate the central bank's transactions with other lending institutions. After the discount rate the central bank can influence the interest rates of commercial banks at the rate of inflation in the country and the course of the national currency.
With decreasing interest rates increases economic activity and inflation increases. Rising interest rates leads to a decrease in business activity, reduce inflation and increase in the price of the currency.
Interest rates depend on: the amount of money in circulation, demand for loans, government policy, assessing the risk of failure to return the lender of the loan, the loan period and the national currency. At the same time, changes in interest rates by the central bank leads to a change in exchange rates.
It is considered that the increase in interest rates leads to a strengthening currency, while lowering the interest rate leads to its reduction in price.
Through a deeper analysis, it should be noted that in forming the exchange rate of two currencies a central role played by the difference in interest rates between two countries (interest differential). If the two countries about the same level of real interest rates, characterized by the same rate of return of investments in the economy of any country, the increase in central bank of one country, the level of interest rates, causing the displacement yields in favor of investments in that currency, which increases the demand for currency and increase its rate.
