What are interest rates?
Interest rates are the price you pay to borrow money, or, on the flip side, the payment you receive when you lend money. (There are such things as negative interest rates, where you instead get paid to borrow money, but these are rare.) Interest rates are generally framed as percentages. Each year you either pay (if you’re borrowing) or receive (if you’re lending) this percentage of the total amount of the loan. For example, for a $100 loan with a 10% interest rate, the borrower would have to pay the lender $10 at the end of the year.
Interest rates are one of the most important numbers in the economy because they influence how likely people are to borrow money. If interest rates are really high, it’s expensive to borrow money. When they’re low, it’s much cheaper. When people borrow money, they’re usually using it to invest in big things like a house or a new business. These investments ripple to the rest of the economy and can boost job growth or even wages.
This is why economists are so obsessed with interest rates. This one number can be thought of as a massive lever that can either spur loads of investments (with low rates), or slow things down when everyone’s getting a bit too excited (with high rates).
So, who gets to decide the interest rate? As you might imagine, economists fight about this. As with other things, supply and demand plays a big part; how many people want to take loans and how many want to lend money. But central banks also have a ton of influence on the interest rate. By buying and selling government debt, central banks can alter the supply and demand for credit, and nudge interest rates up or down. This strategy is one of several central bank tools labeled monetary policy, a topic that’s been very important, and controversial in the recovery from the 2008 financial crash.