Interest rates Credit Suisse

The Power of Interest Rates

How are interest rates actually measured and where does their momentum come from? Anyone who understands the links will find it easier to assess mortgage interest rates and their development.

Interest rates are simply the price of the provision of money and capital. Because the capital providers or creditors refrain from putting their capital to other uses during this time (e.g. consumption), they therefore require remuneration in the form of periodic interest payments. In a market economy, the level of the interest rates is determined as an equilibrium price between supply and demand on the capital market. Monetary policy measures can be used to influence interest rate levels. Supply is currently high and demand low, resulting in low interest rates. If the opposite is the case, this leads to high interest rates.

Credit is what keeps the economy running smoothly. Accordingly, interest rate levels have an impact on economic conditions. Low interest rates mean cheap capital, which in turn means that more investments are entered into because a lot of investments will end up paying off. If interest rates are high, however, then several investment projects stop being profitable and are therefore not invested in. As a result, output and employment suffer and economic growth starts to slow down.

The Yield Curve

Interest rate levels vary depending on the loan period. The yield curve shows this correlation between interest rates and commitment period. Between the short end (term of up to one year) and the long end (term of 10 years or more), the interest rate curve usually exhibits a positive gradient. This is because capital providers tend to prefer liquidity. They are only willing to provide long-term capital and accept the associated risks if they have received an additional premium for this service, which explains the upward curve.