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"Interest Rates: An Introduction" icon

Interest Rates: An Introduction

The interest rate is the chief target of monetary policy, and central banks have the ability to control short-term interest rates to the extent of almost 100%. Longer-term interest rates are anchored in short-term rates. The principal interest rate targeted is the banks’ prime lending rate (PR) (which is a benchmark rate, ie all bank lending rates are referenced on PR). Why? Because new bank lending is the counterpart of money creation, and bank lending/money creation is a reflection of nominal GDP growth (government, companies, and individuals borrow to undertake additional expenditure/investment). The purpose of monetary policy is to influence, via PR, the borrowers’ borrowing behavior – the demand for credit. How do central banks control PR? They do so by setting their own lending rate... Show More


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