Real interest rate is the amount of interest that the borrower has to pay to the lender as the real yield for the amount borrowed. It is broken down as the interest rate after inflation, and real cost of fund has been removed. The real yield is the time value of money when it is in the borrower’s use. Compensation as in interest comes in three risks: first, systematic risk as in the event that the borrower may default; second, regulatory risk as in the amount of increased taxes to be paid; and third, inflation risk as in the event of inflation and currencies fluctuations in the world market. The World Bank defines, "Real interest rate is the lending interest rate adjusted for inflation as measured by the GDP deflator."
The Top Three Countries With Low Interest Rates
Many countries adopted low-interest rates starting May 2015. These measures were taken to ensure economic growth despite the fear of failure. The following low-interest rates were set by Central Banks in 2015 for loans to commercial and depository banks in the event of fund shortages. The country that tops the list with the lowest interest rate in 2015 was Ukraine at -13.1%. Ukraine’s Central Bank lowered its interest again to boost the economy and stabilize prices. Second is Sierra Leone with a low-interest rate of -5.7%. The Monetary Policy Committee of the Bank of Sierra Leone decides the current interest rates in the country. Third is Zambia with a low-interest rate of 0.3%. The Bank of Zambia lowered interest rates again to control inflation after its currency dropped half of its value. Falling copper prices and drought took its toll.
The Other Countries Offering Low Interest Rates
The fourth is Egypt with a low-interest rate of 0.6%. The fear of imported inflation and international food prices fluctuations drove Egypt’s Central Bank to lower interest rates again. Fifth is Macao with a low-interest rate of 0.8%. The Macau Monetary Authority decides on the current interest rates. Low inflation rates resulted in low-interest rates. Unemployment was also another factor. Sixth is Mexico with a low-interest rate of 0.9%. Banco de Mexico, the Central Bank of Mexico dictates the interest rates of the country. It tries to control inflation by maintaining purchasing power and providing currency to the nation. Seventh is Hong Kong with a low -interest rate of 1.0%. Low economic growth and Yuan depreciation initiated the move by the Monetary Authority. Eighth is Hungary with a low-interest rate of 1.1%. Slow economic growth and a need for price growth led the Central Bank of Hungary to lower interest rates. Ninth is Chile with a low-interest rate of 1.1%. Chile’s Central Bank lowered interest rates to stimulate the economy and attract investors. Tenth is South Korea with a low-interest rate of 1.3%. Korea’s Central Bank lowered interest rates to boost spending and attract investments.
Negative Interest Rates
Negative interest rates is a new development in the banking world that began in 2014 in Europe. This new crazy idea was to promote lending, encourage inflation, and stimulate the economy. A few central banks in key European cities started cutting key interest rates below zero in 2014. The Bank of Japan also adopted negative rates in 2016 followed by the European Central Bank in March 2016. Next to adopt the same measure were Denmark, Switzerland, and Sweden. In 2015, the US banking system was also considering adopting the same negative rates.