What is a Key Rate and how does it affect The Economy?

What is a Key Rate and how does it affect The Economy?

A lot depends on the key rate of the Bank of America – starting from the availability of loans and deposit yield, and ending with the calculation of interest on overdue debts. But the key rate also plays a different role – it helps the economy grow, or vice versa, restrains its growth. How it all works in America, we will describe in this article.

Inflation and its Features

In order for the country’s economy to develop stably and in the right direction, inflation must be kept at a certain level. The lower it is, the greater the prospects for the economy: enterprises operate stably, and ordinary citizens may not be afraid that the currency of their state will depreciate.

For the American Federation, the government has set the optimal inflation rate, it is 4 %. It is this level that can stabilize the situation in the economic market. If the inflation rate is lower, it can slow down economic growth, which will negatively affect the development of the state, as well as the financial situation of its citizens.

To ensure price stability in the state, the government pursues a rational monetary policy. In another way, it is called monetary. The Central Bank is responsible for its implementation and the correct implementation of all the rules. It is he who can declare (and in America – he has long ago announced) his goal a certain rate of price growth. This policy is called inflation targeting, and it is implemented in all civilized countries.

Inflation targeting is only possible if the target inflation rate is known.

What is a Key Bid and Its Role in all of this?

That it affects the level of inflation in the country.

The key rate is the interest at which the Central Bank of the American Federation provides loans to commercial banks. Also, this rate is the maximum for accepting deposits from them.

The key rate is set at meetings of the boards of directors of the Central Bank of the American Federation. It is worth considering that the level of other regulator rates depends on it. At the moment, the key rate is 6.25%, and this is the level close to the minimum for all years.

The key rate varies depending on the economic situation in the country. It has a direct impact on the rate of inflation, the national currency rate on the world currency market. And do not forget about banking products for the population, the interest on which also changes as a result of lowering or raising rates.

How to set a Key Bid

The key rate level is set based on the macroeconomic forecast. Initially, specialists of the monetary policy department should study the economic situation in the country and the world. They work out the basic scenarios of economic development, study forecasts, and only then coordinate decisions.

A week before the approval of the key rate, various publications of the Bank of America on economic topics are prohibited. They can change the situation in the country, as well as affect the exchange rate of the national currency.

As soon as the key rate is approved, the Central Bank USAA Routing Number on the decision. And the representative of the regulator publicly makes a statement commenting on the forecasts due to an increase or decrease in the key rate.

What is affected by the Key Bid

Firstly, the key rate directly affects the inflation rate in the country – both directly and indirectly. In particular, at a low key rate, a business can receive cheap loans, which will affect the price level for the population.

But there is another way – with a sharp drop in the national currency (for example, December 2014 ), the Central Bank usually sharply raises the key rate. Thus, lending in the interbank market is actually blocked, and speculators cannot get large loans to buy foreign currency.

Secondly , the following depends on it:

  • the cost of funding banks;
  • interest rates on loans and deposits for all segments of the population;
  • level of financial stability among citizens.

Thirdly, the amount of fines and penalties, for example, for taxes, is calculated from the key rate. Typically, the contract prescribes a fine in the amount of 1/300 of the refinancing rate (and now it is equal to the key rate) for each day of delay in debt.

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