An interest rate is the price which is paid by those who ask for money lent. Interest rates refer to the percentage of money against an amount of money that was lent to someone. Seen from a different angle, interest rates can be seen as the payment of compensation for the risk and the loan of money. Without interest rates, persons, banks and financial institutions would not be willing to lend, since its services as money lenders would not benefit them. In terms of foreign currency interest rates, the lender can be an investor who has money or assets and the borrower can be a bank anywhere in the world. The investor lends money to the Bank and receives, after a set period, an interest that is added to the original amount that was paid according to interest rates that govern to the currency market.
Foreign currency interest rates are usually expressed in terms of a percentage amount over a period of one year. Forex trading interest is credited on a daily basis. Interest rates are central to the changes in the prices of currencies in the foreign exchange market.
What factors affect rates of interests of foreign currencies?
Interest rates of the supply and demand: the foreign currency interest rate levels are a factor of supply and demand for credit. When there is an increase in the demand for borrowing money, the interest rate of the currency increases. On the other hand, the supply of credit will require currency interest rates down while a decrease in the supply of credit will force them to increase.
Interest rates and inflation: foreign currency interest rates are also governed by inflation rates in each country. Interest rates will increase to the extent that inflation is higher. Inflation refers to the fact that a given amount of currency will suffer a decline in their purchasing power in the future. A given amount of money will buy fewer goods in the future than today. The borrower money needs to increase the interest rate to ensure your investment against future inflation.
