Interest Rates

Question 1

What role do Treasury Bill rates play in the economy?

Answer 1

They act as a benchmark or reference rate for short-term interest rates across the economy.

Question 2

Why must companies and banks set rates higher than T-bill rates?

Answer 2

To compensate for credit risk and to earn a profit. T-bills are seen as ‘risk-free’, so riskier loans must offer higher returns.

Question 3

What factors do banks and microfinance institutions consider when setting interest rates?

Answer 3

Reference rate (like T-bill yield), operational costs, borrower’s credit risk, and desired profit margin.

Question 4

Can banks charge whatever interest rate they want?

Answer 4

Not exactly. While there’s flexibility, central banks often set guidance or soft limits, and in some countries, there are legal caps.

Question 5

Why do banks offer low interest on savings compared to lending rates?

Answer 5

To maintain a profit margin. This is called the interest rate spread.

Question 6

What is the consequence of low deposit rates and high lending rates?

Answer 6

It discourages saving and makes borrowing expensive, which can hurt financial inclusion and economic growth.