The Federal Reserve benchmark interest rate (also called the Fed rate) is a key component of the United States central bank’s monetary policy. The federal funds rate influences stock markets, bond markets, consumption patterns, savings and the general health of the economy. Many countries use the Fed interest rate as their benchmark.
Interest Rates in Countries Around the World
India : Reserve Bank of India
The Reserve Bank of India (RBI) is India’s central banking institution. The RBI controls the issuance and supply of the Indian rupee and plays an important part in the development strategy of the Government of India.
OK, I got it. So, what does the Reserve Bank of India really do?
The central bank executes a number of functions including overseeing monetary policy, issuing currency, managing foreign exchange, working as a bank for government and as a banker of scheduled commercial banks. The RBI works for overall economic growth of the country.
Read the following articles on this blog for a detailed account of RBI interest rates and it’s history
- Inflation and Interest Rates in India
- What is MCLR and why is it important for India?
- How Interest Rate changes impact Bond Prices?
United States : Federal Reserve
The Federal Reserve in the United States prefers to keep the interest rate in the low single digits (between 2% to 4%). They reckon at this rate (called Fed Interest Rate), there is enough impetus for economic growth and to keep inflation in check. The Fed interest rate on 26 April 2019 was 2.44%.
The Federal Reserve hiked interest rates to 20% in 1979
Even a vastly developed economy and the wealthiest nation in the world, the United States, has seen its share of vacillating interest rates. Believe it or not, the fed interest rate has gone up as high as 20% in the year 1979 and 1980. The Federal Reserve had to push interest rates up to such levels to combat double-digit inflation.
Great! So inflation went down. Any negative effects?
The consequence of such a high interest rate was the lowering of inflation (which happened as expected). Negatively, it also led to an economic recession (which was also expected although undesirable but largely unavoidable)
The Federal Reserve floored the interest rates to 0.25% in 2008
The lowest the Federal Reserve have taken the Fed interest rate is 0.25%. This was done on 17 December 2008 when the economy was in dire straits after the US housing crisis and global financial meltdown.
Gosh! And then what happened?
The Fed did not raise the rates for the next 7 years and continued with this low interest rate policy. This is not entirely a good thing as it encourages the building of asset bubbles (which was the primary reason for reducing the rates to such lows).
Prior to 2008 too, the fed interest rate had been brought down to very low levels. The Federal funds rate had gone to 1% in 2003 to counter-act the 2001 recession in the United States. This recession was on account of the tanking of the technology stocks (called dot-com crash of 2000; another bubble).
Rest of the World
The RBI sets the interest rate for India. Similar to the RBI, all countries have central banks which have similar powers and function and they too set the interest rate for their respective countries. We have compiled the interest rate offered by major world economies in the table below.
*Prior to the forming of the European Union, countries of Europe had their own Central Banks. Currently, they are follow the interest rates determined by the European Central Bank (ECB). Here’s a list of the Central Banks which are now a part of the Eurosystem –
- Austria – Oesterreichische Nationalbank
- Belgium – National Bank of Belgium
- Cyprus – Central Bank of Cyprus
- Estonia – Bank of Estonia (Eesti Pank)
- Finland – Bank of Finland (Suomen Pankki / Finlands Bank)
- France – Bank of France (Banque de France)
- Germany – Deutsche Bundesbank
- Greece – Bank of Greece
- Ireland – Central Bank and Financial Services Authority of Ireland
- Italy – Bank of Italy (Banca d’Italia)
- Latvia – Bank of Latvia (Latvijas Banka)
- Lithuania – Bank of Lithuania (Lietuvos Bankas)
- Luxembourg – Central Bank of Luxembourg (Banque centrale du Luxembourg)
- Malta – Central Bank of Malta (Bank Ċentrali ta’ Malta)
- Netherlands – De Nederlandsche Bank
- Portugal – Banco de Portugal
- Slovakia – National Bank of Slovakia (Národná banka Slovenska)
- Slovenia – Bank of Slovenia (Banka Slovenije)
- Spain – Bank of Spain (Banco de España)
Central Banks have trillions of dollars in assets
Per recent estimates, Central Banks have over 30 trillion dollars in assets available with them. This amount comes handy in propping up currency exchange rates and with their work towards ensuring economic stability of the geography they represent.
Another report further says that the world’s central banks collectively hold over 33,000 metric tons of the gold. That is about 20% of all the gold that has ever been mined.
75% of the world’s central bank assets are controlled by the United States, China, Japan and the Eurozone. The central banks of Brazil, Switzerland, Saudi Arabia, the UK, India and Russia – each account for about 2.5% each. The remaining 107 central banks hold less than 13 percent.
Here are some articles you can read to get better details on financial and stock metrics
- Rakesh Jhunjhunwala and his secrets to investing (Part 1)
- Building a high return portfolio with index funds – a step-by-step approach
- Complete SIP Investment Guide (over 8000 words compedium updated until 2020)
- The trillion dollar index fund story that John Bogle started in the 1970s
- Best SIP for achieving long term goals