Interest rate of bank interest

The discount rate is the most important indicator, which forms the main aspects of the activity of credit institutions. So, it is an interest rate, established by the national bank of the country for other commercial banks. Its size depends on the monetary policy pursued by the state, and the goals it pursues.

For example, with a high rate of inflation, the discount rate rises. The consequence of this is a rise in price of loans issued by the national bank. Accordingly, the borrowed funds of commercial banks become much more expensive, the demand for the provision of credit services is reduced. In such a simple way, the government helps to reduce the amount of money supply, and then withdraw some of the cash from circulation. This helps to stop inflationary growth and keep it at a certain border.

The discount rate is a tool of the central bank, through which it regulates the main processes of the economy, for example, maintains the exchange rate of the national currency at the required level, controls the amount of money in circulation, and forms the gold and currency reserves of the country. In practice, a sharp increase or decrease in the interest rate is rarely observed , as a rule, minor but no less effective adjustments are allowed.

When the discount rate increases, the exchange rate of the national currency stabilizes. In addition, commercial banks lack credit resources, because central bank loans are becoming an expensive pleasure. It is at this time that the discount rate of bank interest on deposit operations increases. Under the proposed conditions, it is more profitable for the population to transfer the available capital to a deposit account than investing in production or financial activities. Thus, there is a withdrawal of funds from circulation for a certain period, and hence, a reduction in the level of inflation. This method is used in a policy called "expensive" money.

And the policy of "cheap" money implies the availability of a reduced refinancing rate. It is introduced when there is a decline in production activity in the country. The government understands the need to maintain a certain industry and creates such conditions for credit institutions that allow reducing interest rates on loans and loans, especially for legal entities. This is how capital flows into industry or into specific services and stimulates the development of industry.

It is worth noting that the above measures are considered effective, but only in a certain period of time. Further increase or decrease in the rate leads to negative consequences. Unfortunately, each event has some drawbacks. Regulation of the refinancing rate also has the "reverse side of the coin", which is as follows:

• The increased discount rate provokes a decrease in wages, enterprise managers are forced to reduce the number of jobs. All this naturally increases the burden on the labor exchanges and creates tension in the society.
• Lowering the rate, of course, gradually leads the country out of the crisis, as it contributes to the development of the industrial sector. In addition, the state thus supports small and medium-sized enterprises, allowing them to stay afloat even in the most difficult situations. But only for a while, then there is a rapid inflationary growth, which jeopardizes the entire economy of the country.

It can be concluded that the discount rate is a good tool that serves to achieve the main objectives of the monetary and credit policy of the state, but it should be managed competently.