More interest can still buy fewer goods
Interest is the extra money received for saving or paid for borrowing. Its rate compares that extra money with the starting amount over time. A central bank is the institution that uses rates and other tools to influence rising prices and borrowing and spending. Its policy rate affects this process, rather than setting the return on every personal account.
In economy B below, an account grows from 100 to 110 over a year. A group of purchases that used to cost 100 now costs 112, so the account no longer covers them. Purchasing power means how much you can buy. The nominal rate is the rate at which the money balance grows. The real return also accounts for prices over the same time. Inflation is the rate at which those prices rise. These labels in the table describe different parts of the example.
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| Deposit | Nominal interest | Inflation over the same year | Real return |
|---|---|---|---|
| Economy A | 5% | 2% | About 2.94% |
| Economy B | 10% | 12% | About −1.79% |
Both examples assume that the principal, the starting money, and all interest are returned at the end of the agreed year. There are no taxes, fees or exchanges into another currency. The calculation is (1 + nominal rate) ÷ (1 + inflation rate) − 1. Economy A gives 1.05 ÷ 1.02 − 1; economy B gives 1.10 ÷ 1.12 − 1.
In B, a balance of 100 grows to 110. But a basket of goods that cost 100 now costs 112. The account contains more money and still buys less of that basket. A's lower deposit rate leaves a positive real return under its different inflation assumption.
These are invented deposit rates for each economy’s own money, rather than the central-bank policy rates on the map. A policy rate is a rate a central bank sets to influence borrowing and spending. It is not a savings offer. Moving money from A into B would also require an exchange rate, the price for swapping the two currencies, and conversion costs. The price index used here combines the prices of many goods and services; a household buying different things can feel a different change.
A separate question: today's policy rate and expected inflation
A further calculation: today’s rate and expected price rises
The deposit table looks back over a completed year. Comparing today's policy rate with inflation expected in the coming year asks a different question. Expected inflation comes from a survey or estimate and can change. It is not a price increase already measured.
Suppose a hypothetical policy rate falls from 6% to 5%, while expected inflation for the next year falls from 5% to 2%. Subtracting gives 6 − 5 = 1% before the change and 5 − 2 = 3% afterwards. The inflation-adjusted indicator rises because expected inflation falls by more than the policy rate.
Subtracting inflation gives an approximation. For the deposit's exact purchasing-power change under the stated assumptions, use the ratio shown above. A calculation based on today's short-term policy rate cannot establish the return on a one-year deposit, since the policy rate may change during the year.
The same inflation figure can have different causes
Imagine two economies with rising prices. In one, businesses cannot fill orders or recruit enough workers, and wages and service prices are rising together. In the other, domestic spending is weak but imported energy has become expensive. Making borrowing more expensive can encourage people and businesses to spend less. That may ease price pressure in the first economy. Raising interest rates will not immediately produce more oil for the second.
Expensive energy can spread beyond the first bill. Businesses may pass on costs, workers may seek higher pay, and both may plan for further price rises. A central bank has to judge whether that pressure will last, alongside what is happening to jobs, spending and people's ability to borrow.
Some borrowers keep the same agreed rate for several years: a fixed rate. Others have it recalculated on dates named in the agreement: a variable rate. The reference number used in that calculation is called a benchmark. Where variable-rate loans are common, changes can reach existing borrowers sooner. Long fixed periods can delay the effect until those periods end or people take new loans. A bank’s cost of obtaining the money also affects its offers.
For a hypothetical loan with $100,000 outstanding for the full year, an actual contract rate rising from 4% to 5% increases simple annual interest from $4,000 to $5,000. A contract fixed at 4% for that year keeps its agreed interest unchanged. This assumes no principal repayments or fees. It describes a change in the loan rate, rather than automatically adding a policy-rate increase to every loan.
If many fixed periods end next year, some of the pressure from earlier rate increases has yet to reach borrowers. The next policy decision has to account for those coming resets as well as the inflation figure published this month.
A weaker currency can raise an unchanged import bill
Consider an importer who owes a supplier US$10,000. Assume one dollar costs 1.20 units of the importer's local currency: the bill is 12,000 local units. If the price of a dollar rises to 1.32 local units, the same dollar invoice costs 13,200. The extra 1,200 comes from the exchange rate, even though the supplier's price is unchanged.
This example assumes the importer has neither hedged the payment nor bought the dollars in advance. Hedging means using an arrangement, such as fixing a future exchange rate, to reduce the effect of currency changes. A business with dollar earnings might use those earnings to pay the bill instead. Its exposure is different from a business whose income is entirely in local currency.
Higher import costs can feed into retail prices, but a 10% exchange-rate move does not automatically produce 10% consumer-price inflation. Companies have different contracts, competition and profit margins. Some absorb the cost; others pass on part of it or adjust prices later.
A central bank may want to make borrowing cheaper because spending at home is weak. Yet if its money becomes cheaper in exchange for foreign money, imports can cost more. Making borrowing more expensive can create the opposite difficulty by increasing loan bills. The bank has to weigh these effects together.
A country with a high policy rate may be trying to contain inflation or financial stress. Its currency can still weaken, and investors may be unwilling to hold it despite the interest on offer. Our interest rates and exchange rates guide works through the effect on savings when foreign-currency proceeds are converted back into the currency you spend.
Germany and France use the same policy rates
The European Central Bank, or ECB, sets monetary policy for the euro area, the countries sharing the euro and this policy system. Its description of the Eurosystem explains how it works with those countries’ central banks. Germany and France therefore do not each choose separate ECB rates just for their own economy.
So a Germany–France comparison can show a gap of zero percentage points, meaning the two rate numbers are equal. The countries still have different energy use, housing, taxes and loan contracts. Prices can rise at different speeds too. One shared policy rate can therefore have different effects on what people can buy and what they pay on loans.
Using euros is not the same as participating in the Eurosystem. Montenegro uses the euro without euro-area membership, as the ECB's account of euro use outside the area shows. FURRY RATES therefore does not assign it an ECB comparison rate as if it were a member.
Other countries use a different policy instrument altogether. In Singapore, monetary policy centres on the exchange rate. The BIS Markets Committee Compendium describes a framework that manages the Singapore dollar against a basket of trading partners' currencies within a policy band. This is not a fixed exchange rate against the US dollar alone.
Singapore is labeled “Uses other policy tools” here. That does not mean bank deposits or loans pay no interest. It means the site's single-number policy-rate comparison does not represent the framework. Similarly, unavailable data must remain unavailable, rather than being replaced with 0%.
Read a country's rate alongside its explanation
Use country search to find the instrument name, relevant date and source status. A supporting public table may supply a number without identifying the detailed instrument. Without that detail, its place in a ranking cannot show how strongly policy is encouraging or discouraging spending.
The central bank's decision statement explains why it chose that level. Compare it with the previous decision too: a hypothetical rate of 10% is higher than another country's 5%, yet a move from 12% to 10% means the central bank has cut its rate. Check that both records refer to the same instrument and that their dates mean the same thing.
The home page's median gives equal weight to qualifying country and region entries, including separate euro-area members sharing a rate. It excludes delayed and historical values under the stated currentness rules and is not weighted by economic size. The median marks the middle of this list. A country's position above or below it does not establish whether its policy is appropriate or its deposits are attractive.
For the practical details of target ranges, percentage-point subtraction and different date labels, continue with how to compare policy rates.
Sources and assumptions
- ECB: the Eurosystem and euro area
- ECB: euro use outside the euro area
- BIS Markets Committee Compendium: Singapore's policy framework
The deposit, loan and import-bill amounts are fictional and use the conditions stated beside each calculation. They are not policy forecasts or product offers. See our editorial policy.
The BIS link identifies the framework discussed above. This is not an official BIS publication or translation, and the BIS does not guarantee its accuracy or completeness. The original content is available on the BIS website through the source link above.