Sorry if this is a basic question. I know that the central bank sets the base interest rates (or at least a target rate) and the banks then charge an additional rate on top of that.
What I would like to know is do the banks keep all of the interest paid or is it just the part of the rate that they set?
The commercial banks borrow off the central banks at the basic interest rate. Then they lend to the consumer and charge a bit more. The commercial banks only keep the difference between the basic rate and their own rate.Originally Posted by momoney
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Note that the price of interest is set by central economic planners, and can result in a price that is inconsistent with people's real time preference - as the current crisis demonstrates this can set misleading signposts for consumers and investors.
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The ECB lends to financial institutions, and the ECB raises or lowers (or leaves alone) the interest-rates on those loans. Hence, the ECB raising the rates acts as a push factor for financial institutions to raise rates on loans to customers, whereas lower interest rates allow the banks to cut interest-rates on such loans. But obviously there isn't the same kind of push-factor for them to do the latter.
In the present financial crisis, central banks cutting interest rates has been likened to "pushing a piece of string".
We are NOT going to the gold standard!!!!
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Get ready for more central economic planning then.
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We do not need that either.
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Speak for yourself!
Can anyone recommend an affordable and safe option for trading in precious metals?
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Another question is what the ECB does with the interest it gets. Presumably, they don't actually spend it, it is effectively removed from the economy.
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