The interest rate of an investment or loan is the percentage applied to calculate its interest.

In the case of loans, it is the percentage applied to the amount owed, and in the case of investments or deposits, it is the percentage applied to these to calculate the return.

It differs from interest in that interest is an amount, while the interest rate is a percentage. When applying the interest rate on an amount we obtain an amount that is the interest.

We can see this more clearly with an example:

If the interest rate on a deposit is 3%, and I have €1,000 in the deposit, after one year I will receive €30 in interest.

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Interest rates are a tool of central banks to control inflation. When inflation is high, central banks raise interest rates to make it more expensive to get money and lower prices.

In the opposite case, when inflation is very low, central banks will tend to reduce interest rates in order to stimulate investment and thus demand.

The interest rate can be a nominal interest rate or a real interest rate, and it is very important to differentiate between them, because in high inflation environments they are very different.

The interest rate charged or paid by financial institutions is the result of the relationship between supply and demand, inflation, the risk premium and the official interest rate set by the central bank.

In turn, central banks use interest rates to influence the price level. The interest rate set by the central bank is the so-called official money rate.