Interest rate level

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In economics, the interest level is the more or less changing amount of a certain interest rate within a certain time interval .

General

Economics is concerned with various statistical data for comparison and analysis purposes , which are summarized in the form of curves for a certain period of time with a specified series of data. This level set includes, among other things, the price level , with which, in particular, price level stability is measured, the domestic production level , the exchange rate level or the interest rate level, which can be visualized using interest curves . It examines how the central bank uses its monetary policy to control the level of interest rates, which has an impact on the stock market , the entire capital market and currency parity . The bank management is concerned with the level of interest rates, particularly its impact on the market risk , interest rate risk and the profit and loss account .

Purpose and types

The interest rate level is used to compare other types of interest ( short-term or long-term interest rate , interest rate on money and capital markets), to the past (interest rate 1980–1990), at different locations ( interest rate differentials ) or to other countries (German or American interest rates). A distinction is made between a high interest rate and a low interest rate level according to the amount , which expresses whether the interest rates are at a higher (e.g. 10%) or lower (e.g. 1%) level for a longer period of time. If the interest rate level shows (approximately) the same interest rates for several terms, one speaks of an indifferent “flat interest rate curve” . It is an indicator that almost unchanged short-term interest rates are expected. It is empirically proven that a low interest level (“flat interest curve”) goes hand in hand with price level stability. Depending on the curve of the interest rate level, there is a “normal” interest rate structure with rising interest rates for longer terms, while conversely an inverse interest rate structure shows falling interest rates. An inverse interest rate structure shows that the central bank is pursuing a restrictive monetary policy and that inflation expectations are therefore low. The interest rate is considered a presence or lagging indicator .

Effects

The level and changes in interest rates are among the most important influencing factors in an economy because they have a comprehensive, either direct or indirect, effect on all economic sectors .

The absolute level of interest initially affects the individual economic interest expenses on loans and interest income on financial investments ; it also has an economic effect on supply and demand on the credit market . Should the interest rate rise in one of the international credit markets , credit seekers will try to obtain credit in another credit market. This leads to a convergence in interest rates. The level of interest on the credit market is determined by the supply and demand of credit. At the same time, loan providers will increasingly offer loans in markets with higher interest rates. Falling demand and increasing supply on the credit market with higher interest rates mean that interest rates are now converging. The interest rate development on the money market also influences the interest rate level on the capital market , since an increased money market interest rate leads to an inflow of money into this market, which leads to an outflow of money on the capital market that increases the interest rate .

The investments made in the boom phase with increased interest rates turn out to be unprofitable if the price level is relatively stable, profits and labor costs fall with the risk of an increase in corporate crises . Because additional investments increase the demand for money and thus the level of interest. The consequence of rising interest rates is a decrease in employment , which is reflected in an increase in the unemployment rate . There is also a positive correlation on the stock market between the level of interest rates and the expected stock return . If interest rates are high, there is little interest in stocks and their price level is low, which means a high dividend yield .

Another factor worth mentioning is the influence of interest rates on public finances . A government budget in deficit has a negative financial balance , which takes into account interest expenditure on government debt such as government bonds . If the interest rate rises, the negative financial balance will continue to rise - assuming the other conditions remain the same - and require additional new borrowing by the state, which can contribute to a further rise in interest rates on the capital markets. This self-reinforcing process can lead states with a high national debt ratio to a financial crisis through an unfavorable interest burden ratio , as was the case with the euro crisis and especially the Greek national debt crisis . If, for example, the national debt (gross) reaches the level of the gross domestic product (national debt ratio therefore 100%) and - assuming an interest rate of 6% - the tax revenue is 30% of the gross domestic product, the tax revenue is already burdened with 18% interest expense ( interest coverage ratio ). After servicing the debt , the state then only has around 80% of the tax revenue for its actual public finance tasks .

An interest rate differential with other countries regularly leads to an export of capital to the country with the higher interest rate level. If the domestic interest rate rises, this has an appreciation effect against foreign currencies via capital imports and vice versa. The expectations of revaluations or devaluations often exert a stronger influence on the movement of money than the international interest rate differential. More recent economic explanatory models understand the interest rate level as an endogenous variable that develops simultaneously with the exchange rate ; a flight of capital can therefore be countered by increasing the domestic interest rate. An expansionary monetary policy, in turn, increases the price level, so that it goes hand in hand with rising interest rates. Conversely, in a recession, prices tend to fall and interest rates fall because the demand for credit falls. In general, the higher the actual or expected inflation rate , the higher the nominal interest rate .

With their interest rate policy as an action parameter , the central banks influence the short-term interest rate level in their country against the background of economic development. The key interest rate , which has been set by the European Central Bank since January 1999, should be mentioned in particular as an influencing instrument . It is responsible for determining the key interest rate and has chosen three aggregates, namely an interest rate for the main refinancing business , for the marginal lending facility and for the deposit facility . Their influence on interest rates and exchange rates also opens up opportunities for indirect influence on consumption , investments and capacity utilization , exports and imports .

The low interest rate puts all creditors and investors at a disadvantage ( savers or insurance companies , including company pension provisions ) and benefits all debtors and borrowers ( corporate financing, highly indebted countries ). Conversely, this also applies to high interest rates.

Individual evidence

  1. ↑ Manfred Borchert, Money and Credit: Introduction to Monetary Theory and Monetary Policy , 2003, p. 43
  2. ↑ Manfred Borchert, Money and Credit: Introduction to Monetary Theory and Monetary Policy , 2003, p. 35
  3. ↑ Manfred Borchert, Money and Credit: Introduction to Monetary Theory and Monetary Policy , 2003, p. 43
  4. ↑ Gabler Wirtschaftslexikon, AD, 2004, p. 2094
  5. ↑ Dirk Rathjen, The Macroeconomic Determinants of the DAX , 2000, p. 58
  6. ↑ Pascal Gantenbein / Klaus Spremann, Zinsen, Anleihe, Kredite , 2014, p. 25
  7. ↑ Gabler Bank-Lexikon: Concise Dictionary for Banks and Savings Banks , 1978, Sp. 1738 f.
  8. ↑ Herbert Obinger / Uwe Wagschal / Bernhard Kittel (eds.), Political Economy: Democracy and Economic Efficiency , 2006, p. 204
  9. ↑ Manfred Borchert, Money and Credit: Introduction to Monetary Theory and Monetary Policy , 2003, p. 142
  10. ↑ Claus Köhler, Geldwirtschaft, Volume 2: Balance of payments and exchange rate , 1979, p. 13 1