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Interest Rate

An interest rate is an annualized price charged by a lender to a borrower in order for the borrower to obtain a loan.

Specifically, it is a percentage of principal paid a certain number of times per period for all periods during the total term of the loan or credit.

Interest-rate targets are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment.

Higher interest rates increase the cost of borrowing which can reduce investment and output and increase unemployment.

The central banks of countries generally tend to reduce interest rates when they wish to increase investment and consumption in the country's economy. At the same time, a low interest rate as a macro-economic policy can bear risks leading to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market.