Why Do Interest Rates Differ From Country to Country?

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Interest rates affect any financial consumer looking to either borrow or save money. From getting a mortgage or putting money into a pension even the interest rates on personal loans, the rate a financial institution has always been regulated to ensure a fair and transparent marketplace.

Interest rates are set by the authority that controls the local currency in their respected countries. For example in the United States it is called the Federal Reserve, in the United Kingdom the Bank of England and in Australia it’s simply known as The Reserve Bank of Australia. These authorities have the power to let banks know what the cost of borrowing can be at any given time based on the performance of the economy. That is why you can see an economy like the United Kingdom which is currently experiencing extremely low interest rates as a way of attempting to stimulate the economy, provide affordable lending for house purchases and   even encourage the budget conscious to use some of their savings for something special. Compare this to Australia where interest rates are higher but economy is currently on a strong footing and also influenced by the flow of capital from abroad.

Interest rates are also influenced by spending habits. Let’s look at the 2 extremes, spending and saving. If confidence in the economy is low most people tend to save their money for a rainy day, this would impact interest rates as banks would see an influx of capital they could use to invest in banking projects thus making the cost of money relatively cheap.

On the other hand if there is quite a bit of confidence in the economy people tend to spend money, businesses flourish and demand for capital is needed. This is where banks can make the most of the economy by charging higher interest rates determined by the Currency authority (The Federal Reserve in the US or the Bank of England in the UK).

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

1 Comment

  1. Really interesting information there! There is such a gulf between the cost of money in the UK where money is cheap and countries such as New Zealand where interest rates are really high.

    I look at the housing sector as an indicator for the cost of money. Seems like property is cheap in the UK at the moment and expensive in NZ!!!


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