The key rate – an important means of regulating inflation
The key rate is closely related to inflation. In Switzerland this is set by the Swiss National Bank to control inflation. The key rate is the rate at which banks can borrow money from the SNB. The banks in turn pass this onto businesses in the form of debt interest. When key rates are low, loans are less expensive for businesses and consumers. This makes investment more lucrative, generating economic growth. Consumers also spend more money due to low interest rates on loans. This causes the economy to grow and inflation to rise. However, this annoys savers because they receive a low return on their savings.
Savers are pleased when the key rate is high as they obtain more interest on their savings accounts. In contrast, borrowers and consumers take out fewer loans or spend less money. The economy slows down because people generally spend less.
The next time you hear or read that the SNB or US Federal Reserve have lowered or increased key rates, you’ll know what’s going on: a higher or lower amount of money is flowing into the economy. Central banks obviously don’t just adjust key rates due to inflation.