The price of borrowing money

The lesson in full

Borrow US$1,000 for a year at 10% and you pay back US$1,100. That extra US$100 is interest. An interest rate is the price of borrowing money.
It works for savers too: put US$1,000 in a deposit at 5% and the bank pays you US$50 after a year. Rates touch your loans, your savings, even a phone bought in instalments.
Each central bank sets a main rate for its currency: the Fed for the dollar, the ECB for the euro, Bank Indonesia for the rupiah (the BI-Rate), Banxico for the peso. Banks' loan and savings rates follow it.
Higher rates → loans cost more and saving pays more → people and firms spend less → price rises cool down. Rate cuts work the other way and speed the economy up.
USD/JPY, 2007 to 2011 (monthly). The Fed cut its rate from 5.25% to near 0%, so holding dollars paid barely more than holding yen. Add scared investors buying yen, and the dollar slid from about 124 yen to about 76.
Common mistake
Myth: a rate rise always lifts the currency. Reality: markets look ahead. If everyone expected the rise, it's already priced in. Surprises move currencies most.
Key takeaway
Interest rates are the price of money. Higher rates cool spending and often attract money to a currency; lower rates do the opposite.

An interest rate is... The price of borrowing moneyBorrowers pay it to use someone else's money; savers earn it for lending theirs.
To cool down rising prices, a central bank usually... Raises ratesHigher rates make loans dearer, so people and firms spend less and price rises slow.
A surprise rate rise usually makes that currency... StrongerA higher return than expected pulls money into the currency. If the rise was already expected, the move is often small.
You borrow US$2,000 for one year at 5% interest. How much interest do you pay? US$1005% of US$2,000 is US$100 (2,000 × 0.05).