The accounting rate of Bank interest

The discount rate is a key indicator, which forms the main aspects of credit institutions. So she represents the interest rate set by the national Bank for other commercial banks. Its size depends on the monetary policy pursued by the state, and the goals that it pursues.

For Example, if a high rate of inflation discount rate increases. The result is rise in price of credits issued by the national Bank. Accordingly, borrowings of commercial banks have become much more expensive, reduced demand for credit services. In this simple way the government helps to reduce the volume of the money supply, then removing cash from circulation. This helps to stop the inflation growth and keep it in a certain boundary.

Rate – is a tool of the Central Bank, through which it regulates the main processes of the economy, for example, supports the national currency rate at the required level, controls the volume of money in circulation, generates foreign reserves. In practice, very rarely there is a sharp increase or decrease in interest rates, as a rule, slight, but no less effective adjustments.

When the discount rate increases, the rate of the national currency stabiliziruemost. In addition, commercial banks are experiencing a shortage of credit, because the Central Bank loans become expensive. It was at this time increases the discount rate of Bank interest on Deposit transactions. The proposed conditions for the population more profitable to translate the available capital in the Deposit account than investing in production or financial activities. Thus, there is a withdrawal of funds from circulation for a certain period, and hence a decrease in the level of inflation. This method is used when conducting a policy called ‘expensive’ money.

A policy “cheap” money suggests the presence of reduced refinancing rate. She is introduced when there was a decline of production activities in the country. The government understands the need to maintain a certain industry and creates the conditions for credit institutions that reduce interest rates on loans, especially for businesses. So there is an overflow of capital in industry or sector specific services and stimulated the development of the industry.

It is Worth noting that the above measures are considered effective, but operate only in a certain period of time. Further increase or decrease in rates leads to negative consequences. Unfortunately, every event has some disadvantages. Regulation of the refinancing rate also has a “reverse side of the coin”, which is as follows:

• Increased the discount rate provokes a reduction in wages, business leaders are forced to reduce the number of jobs. All of this naturally increases the burden on labour exchanges and creates tension in the society.
• A reduced interest rate, of course, gradually leads the country out of crisis, as it contributes to the development of the industrial sector. Besides, the state thus supports small and medium enterprises, allowing them to stay afloat even in the most difficult situations. But only for a while, then there is a rapid inflationary growth, which jeopardizes the entire economy.

It is Possible to conclude that the discount rate is a good instrument for achieving the main objectives of monetary policy, but they should competently.