Glossary · Money and central banks
Interest rate
An interest rate is the price of borrowing money, as a percent per year. A central bank’s key rate is the one that steers all the others.
Also called: key rate, policy rate, central bank rate, base rate
Effective rate, November 9, 2026. Euro area: the ECB deposit rate is 2.50%.
Monthly average, Jun 1981.
Months below 0.25%, since 1954: 109.
In plain words
Borrow $1,000 for a year at 6% and you pay back $1,060. The extra $60 is interest, and 6% is the interest rate: the price of using someone else’s money for a year. Put money in a savings account and the bank pays you interest, because now you are the lender.
Rates differ by who borrows and for how long: a government pays less than a company, a company less than a person with a credit card. But almost all of them move with one rate set by the country’s central bank, its key rate (also called the policy rate).
In the United States that is the federal funds rate, the rate banks charge each other for overnight loans, which the Federal Reserve steers into a target range. It is 3.88% now (November 9, 2026).
Example
How a 1-point rise in rates reaches a family
- The central bank lifts its key rate from 3% to 4%.
- Borrowing gets dearer across the board; say new 30-year mortgage rates go from 6% to 7%.
- On a $300,000, 30-year mortgage the monthly payment rises from $1,799 to $1,996: about $197 more every month.
- A saver with $10,000 in a deposit that follows the key rate earns about $100 more a year.
Multiply that by millions of loans and you see how one rate can slow down or speed up a whole economy.
One level deeper
Why does one overnight rate matter so much? Banks fund themselves at it, so when it rises they charge more for car loans, business loans and credit cards, and pay a little more on deposits. Mortgage rates and bond yields move too, partly because markets guess where the key rate is heading.
Central banks raise the key rate to cool inflation: dearer borrowing means less spending, and prices calm down, usually after a year or more. They cut it to support the economy in a recession. To beat the inflation of the 1970s, the Fed pushed the federal funds rate to a monthly average of 19.1% in Jun 1981. After 2008, and again in 2020, it held it near zero, for about 9 years in all.
What matters for savers and borrowers is the real interest rate: the rate minus inflation. Earning 5% while prices rise 3% is about 2% in real terms; earning 5% while prices rise 8% means your savings are shrinking.
The Fed’s key rate since 1954
The effective federal funds rate, month by month. It peaked at 19.1% in Jun 1981, was held near zero after 2008 and in 2020, and moves in steps as the Fed changes its target.
The numbers behind the chart
| Date | Federal funds rate |
|---|---|
| Jul 1954 | 0.8% |
| Dec 1960 | 2.0% |
| Dec 1970 | 4.9% |
| Dec 1980 | 18.9% |
| Dec 1990 | 7.3% |
| Dec 2000 | 6.4% |
| Dec 2010 | 0.2% |
| Dec 2020 | 0.1% |
| Dec 2022 | 4.1% |
| Dec 2023 | 5.3% |
| Dec 2024 | 4.5% |
| Dec 2025 | 3.7% |
| Nov 2026 | 3.9% |
Why it matters
Interest rates set the cost of nearly every loan: mortgages, car loans, credit cards, company investment and government debt.
They move the prices of everything you can invest in. Higher rates make bonds and savings accounts more attractive and usually weigh on stock and house prices; lower rates do the opposite.
They are the main tool central banks use to keep inflation near their target, usually about 2%.
A common mistake
Myth: The central bank sets my mortgage rate.
In fact: It sets only a very short-term rate for banks. Long-term rates like 30-year mortgages are set in markets and follow long-term bond yields, which depend on expected inflation and growth. They can even rise while the central bank is cutting, as they did in late 2024.
Questions people ask
Who decides the interest rate?
Each country’s central bank sets its key rate: in the US, the Federal Reserve’s Federal Open Market Committee, which meets eight times a year; in the euro area, the European Central Bank. Banks then set their own loan and deposit rates on top of it.
Why do central banks raise interest rates?
To slow inflation. Dearer borrowing cools spending and hiring, which takes pressure off prices. The cost is slower growth, and sometimes a recession.
What is the ECB’s interest rate now?
The European Central Bank steers euro money markets with its deposit facility rate: 2.50%, set on September 16, 2026.
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About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US recessions (NBER business cycle dates): National Bureau of Economic Research (NBER), Business Cycle Dating Committee: US Business Cycle Expansions and Contractions.
- ECB deposit facility rate: European Central Bank, ECB Data Portal, series FM.B.U2.EUR.4F.KR.DFR.LEV (key ECB interest rates: deposit facility).
- Effective federal funds rate: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series H15/H15/RIFSPFF_N.D (Federal funds effective rate), Data Download Program. The EFFR is subject to the Terms of Use posted at newyorkfed.org. The New York Fed is not responsible for publication of the EFFR by BigCapital, does not sanction or endorse any particular republication, and has no liability for your use.
- This page explains a term. It is not investment advice.