Factors determining the rate of interest in an economy
- Credit Management performance standards – e.g. banks and other financial institutions. Credit management efficiency levels determine the size of nonperforming loans and bad debts, which tend to force banks and other lending institutions to readjust and try to cushion themselves with revision of interest rates on new loan agreements.
- Size of government budget deficit – budget deficits necessitates government borrowing from the open market through manipulation of the treasury bill rates; treasury bill rate is usually used commercial banks as a benchmark to determine their base lending rates.
- Demand for and supply of loanable funds
- Inflationary tendencies – direction of change in the average level of prices.
- Availability of off shore lines of credit – determines the rate of interest charged domestic lenders.
- Exchange rate variation – lenders with off shore lines of credit, for instance, (for the purposes of lending domestically) and who have to repay in hard currencies, will have to adjust upwards their interest rates whenever the domestic currency depreciates.
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