Interest Rate

Interest rate is the cost of borrowing. Interest rate usually set on loans by banks. Interest rate is determined the rate of demand and supply, rate of inflation and decisions of the government.If there is an increase in the demand for credit, the interest rates will increase, while a decrease in the demand for credit will decrease interest rate. An increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase the rate. Inflation is a major component effecting the interest rate, the higher the inflation the higher the interest rate due to the increase in demand of credit by lenders/ the bank. At the end, the government is the one deciding the increase or decrease in the interest rate, as it handles the monetary policies.