The Basics
- Simple definition: The cost of borrowing money or the reward for saving it, expressed as a percentage.
- Core idea: The price of money over time.
- Think of it as: Rent you pay for using someone else’s money.
What It Actually Means
Interest rates come in many forms: policy rates (set by the central bank), lending rates (banks charge borrowers), deposit rates (banks pay savers), and bond yields (government borrowing cost). They affect everything: mortgage payments, business investment, consumer spending, exchange rates, and inflation. Higher rates cool economies by making borrowing expensive and saving attractive.
Example
When the State Bank raises its policy rate to 20%, business loans become expensive, so firms invest less. Mortgages cost more, so housing demand falls. Savers earn more, so spending drops. Inflation eventually slows.
Why It Matters (2026)
After a decade of near-zero rates, the world adjusted to higher rates. This affects government debt costs (Pakistan spends much of its revenue on interest), corporate profits, and household budgets.
Types
• Nominal interest rate: Stated rate, not adjusted for inflation
* Real interest rate: Nominal minus inflation – the true cost
* Fixed rate: Locked for the loan term
* Variable rate: Fluctuates with the market
See also
Monetary Policy • Real Interest Rate • Nominal Interest Rate • Policy Rate • Yield Curve
Read more about this with MASEconomics: