With the base rate, the Capital Lender sets an interest rate that is used to control monetary policy. The key interest rate defines the conditions under which the banks can borrow money from the central bank. The level of the key interest rate then also determines the interest rate that the banks charge when they pass on loans to consumers and the interest rate that they pay when customers invest money. The Capital Lender’s aim is to keep the inflation rate as low as possible and to keep prices stable. The price increases should be limited to less than two percent if possible. The Capital Lender sets, so to speak, the price at which the money can be bought. The banks then offer the money to their customers in the form of loans with a corresponding premium.
Why are interest rates increasing?
In the event of an interest rate hike, as in the last one in July 2008 by 0.25 basis points, the banks then pass on the increased interest to customers. Interest rates for the overdraft facility are increasing, interest rates for consumer loans are increasing and building money is also becoming more expensive. At the same time, saving is rewarded, and interest rates on savings such as overnight money rise. Theoretically, this means that fewer loans are taken out and more is saved because this is more attractive. If less is consumed, demand for consumer goods and services will decrease and manufacturers will be forced to change their pricing policies. Share prices fall and bond yields rise, resulting in a decrease in the money of shareholders and mutual funds.
As a result, consumption is restricted. For example, the increase in key interest rates can somewhat restrict demand and inflation can be dampened. Even the export is reduced. The interest rate increase leads to an increase in the value of the euro, goods from Europe become more expensive abroad, imports become cheaper. This also slows down the pressure on prices. The increase in key interest rates has an impact on the labor market, and the demand for workers is falling. The key interest rate is therefore of great economic importance, the extent of which many consumers are not familiar with in detail. Interest rate increases are positive for savers, especially in the area of overnight money, because the higher interest rates are passed on at short notice.
Why can’t fixed interest rates?
The increase in interest rates for the overdraft facility is immediately noticeable for the consumer. If you take out a construction loan in high-interest phases, you shouldn’t fix the fixed interest rate for too long and focus on lower interest rates. It remains to be seen whether the Capital Lender will achieve its goal with the last rate hike. If the Capital Lender lowers the key interest rate and the market is in a low-interest phase, long fixed-interest periods are more advantageous for home loans. This has a rather negative impact on savers. However, it cannot be assumed that a rate cut would immediately lead to a drastic cut in interest rates on overnight money, as the banks would quickly lose their customers again.