What are key interest rates?


By Bitpanda

The economic situation and the climate for investors are significantly influenced by key interest rates from the central banks. What are key rates and why are they relevant when you invest money? Here is a brief overview of everything you need to know.

In reports by financial and economic media, you’ll likely come across the term "key interest rate" in almost all articles related to investing and publications about economic development in general.

What does the term "key interest rate" mean?

The "key interest rate," also “key rate” for short, is set by a country's central bank. You remember that an interest rate refers to the price of money or capital and is expressed as a percentage - that is, as a percentage of the interest rate. The key interest rate or key rate is the interest rate at which commercial banks can deposit money or borrow money from the central bank or Federal Reserve. For countries, key interest rates are an instrument for monetary policy measures, as the level of key interest rates also influences general interest rate levels.

Why are key interest rates so low right now?

After the global financial crisis of 2007/08, central banks began to provide more liquidity than before to foster and ensure the stability of the badly-shaken banking system. Since then, many nations have tended to set key interest rates at a very low level. This is generally expected to promote investment, to provide attractive conditions for taking out loans and to boost a national economy’s performance.

More precisely, measures like this are set in anticipation of stabilising the national budgets of individual countries at a quicker rate because a country is able to consolidate their public debt more easily when interest rates are low. Commercial banks also push more capital into an economy, thus increasing economic growth and productivity.

How does the key interest rate affect savings and investments?

Another result of low key interest rates, however, is that income from bank deposits in savings accounts or call deposit accounts also decrease. This may mean (in some cases) that savings hardly yield any profits at all. In comparison, stock markets may benefit from low interest rates since a growing economy, apart from minor price corrections, tends to have positive effects on share prices.

Which investment strategies are there?

If you are a first-time investor of course, starting with stocks is an option. However, exchange-traded funds (ETFs) as a securitised investment product offer first-time investors an easier way to start investing in several stocks at one time. An ETF is made up of numerous securities and therefore helps you to diversify your portfolio significantly and to spread your investment risk.

An ETF usually follows the performance of a stock index. Investing directly in an index as such is not an option. An index in itself is a measure of change in a value factor tracking data, in this case, data concerning prices. ETFs that track the major indices of leading global markets are particularly popular with investors, such as the S&P 500 as one of the equity indices with the largest fund volume.

How can I invest in the S&P 500?

The Top 500 US Stocks is an exchange-traded index fund (ETF) that tracks the performance of the S&P 500 index as closely as possible. With Bitpanda Stocks*, you can invest proportionally in ETFs, such as the Top 500 US Stocks, from as little as €1, commission-free and with tight spreads. This is made possible by derivative contracts covered by the underlying stocks and ETFs.

*Bitpanda Stocks enables investing in fractional stocks. Fractional stocks in Europe are always enabled via a contract which replicates the underlying stock or ETF (financial instruments pursuant to section 1 item 7 lit. d WAG 2018). Investing in stocks and ETFs carries risks. For more details see the prospectus at bitpanda.com.