Who sets interest rates?

Interest rates are typically set by a variety of entities, including:

1. Central Banks: Central banks, such as the Federal Reserve in the United States or the European Central Bank in the European Union, use monetary policy tools to influence interest rates in the economy.
2. Banks and Financial Institutions: Banks and other financial institutions set interest rates on loans and other financial products based on their own risk assessment and profit margins.
3. Borrowers and Lenders: Interest rates are also set between borrowers and lenders through negotiations on the terms of a loan or credit.

Interest rates are foremost negotiated between the borrower and the lender, however the central bank interest rate offers an attractive competitive option to lenders such as banks and financial institution because the interest gained by depositing the money at the central bank is risk-free. There is no chance of default. That’s why lenders will typically set a premium for borrowing to entities or individuals as they run the risk that the entity or individual would not repay them.