What is an interest rate?

Interest rate: The price of borrowing money. Central banks such as the ECB and the Fed set the base rate and so influence the mood of the market.

If you borrow money, you pay interest. If you put money in a savings account, you receive interest, because the bank uses your money. Interest is usually given as a percentage per year.

Central banks such as the ECB and the Fed set the base rate. Banks adjust their own rates for savings and mortgages to it.

A higher rate makes borrowing more expensive and saving more attractive. That can push shares and bonds down. A lower rate often works the other way.

Example
You put 5,000 euros in a savings account at 2 percent interest a year. After one year you receive 100 euros interest. If you leave it there, the next year you earn interest on 5,100 euros, which is 102 euros.

Watch out
A high rate on a savings account or loan says something about the risk. It is worth checking whether your money falls under the deposit guarantee scheme.

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