Since China s current benchmark interest rate is higher than the comparable rate in the United States, individuals and institutions have an incentive to keep renminbi as assets and dollars as debt.

But the interest rate that Greece must pay buyers of its government bonds has shot up to a record high level of nearly 9 5.9 percentage points above the benchmark rate paid by Germany.

The effective interest rate, effective annual interest rate, annual equivalent rate (AER) or simply effective rate is the interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears.

In such systems, the government directly controls the benchmark interest rates.

On June 27, the People s Bank of China lowered the reserve requirement ratio and the benchmark interest rate. But the Shanghai Composite Index kept falling, reaching 4,200 on July 1.

BERLIN In recent days, Germany s representative on the European Central Bank s governing council has expressed strong disagreement with the ECB s decision on November 7 to cut its benchmark interest rate.

Right before the Fed acted, the Reserve Bank of India raised its benchmark short term interest rate by 25 basis points, to 6.25 , to fight inflation, and China s central bank now indicates that it might raise interest rates further.

Third, benchmark interest rates are already near zero, and have been for a while.

America s Interest Rate Puzzle

China s Interest Rate Challenge

The central bank has already cut its benchmark interest rate by 150 basis points, to 11 , and the downward trend is expected to take real rates to record lows in the post crisis period.

The Real Interest Rate Risk

To define an interest rate fully, allowing comparisons with other interest rates, both the interest rate and the compounding frequency must be disclosed.

In the United States, the Federal Reserve has lowered its benchmark interest rate ten times since August 2007, from 5.25 to a zone between zero and 0.25 , and has reduced the discount rate 12 times (by a total of 550 basis points since June 2006), to 0.75 .

The measures include tighter limits on home purchases by non locals in cities with excessive price gains, a reinforced 20 capital gains tax, mandatory 70 down payments, and a 30 benchmark interest rate premium for second mortgages.

The fundamental benchmark interest rates in modern financial markets are the so called risk free rates on government bonds.

The second adverse effect of deflation is to raise the real interest rate, that is, the difference between the nominal interest rate and the rate of inflation.

But interest rate convergence caused economic divergence.

But when prices are falling, the real interest rate exceeds the nominal rate.

But the system rests on the assumption that the government will set accurate benchmark interest rates for risk free assets.

According to the followers of Knut Wicksell, the central bank must keep the market rate of interest near the natural rate of interest.

But financial decentralization extends beyond interest rate liberalization.

Finally and perhaps most importantly the People s Bank of China has raised its benchmark policy rate five times since October 2010.

Because the inflation rate is also about 2 , this implies a negative real interest rate, which is confirmed by the interest rate of 0.6 on ten year Treasury Inflation Protected Securities (TIPS), which adjust interest and principal payments for inflation.

And the Bank of England has cut its benchmark rate nine times, by 525 points, to an all time low of 0.5 .

At present, the interest rate is less than 0.5 .

Emerging market interest rate spreads now are abnormally low.

Italy, however, chose to squander that interest rate advantage.

The government (the visible hand) sets the benchmark price for risk free financial assets through monetary policy and control over fiscal deficits, while the market (the invisible hand) sets the risk premia of risky assets above the benchmark rate.

And it is the real interest rate not the money rate that counts for economic growth.

That way, limited interest rate spreads could do the work of its missing exchange rate mechanism.

(The Fed raised its benchmark federal funds rate from 1 in 2004 to 5.25 in 2006 and held it there until August 2007).

Indeed, according to Morgan Stanley, monetary authorities in 16 of the 33 countries that it follows including seven of ten advanced country central banks and nine of 23 central banks in emerging markets have either cut their benchmark interest rate or lowered reserve requirements.

In the United States, this interest rate is the federal funds rate in the United Kingdom, it is the official bank rate.

Domestic deflation means that the real interest rate on Japanese bonds is higher than the nominal rate.

One may ask how can an interest rate be negative?

Gold prices are extremely sensitive to global interest rate movements.

With its benchmark lending rate at the zero bound, the Fed has embraced a fundamentally different approach in attempting to guide the US economy.

And, in the United States, where inflation exceeds 2 , the Federal Reserve s benchmark federal funds rate remains at an historic low of 0 0.25 .

Financial reforms should top the agenda, beginning with interest rate liberalization.

That could matter a lot in relation to interest rate decisions.

Sometimes interest rate changes have the predicted effect, sometimes they don't.

Unless the ECB picks up the pace of interest rate increases now, the goal of interest rate neutrality may not be politically feasible, jeopardizing achievement of the bank s price stability goals.

The Fed could, in principle, limit inflationary lending by raising the interest rate on excess reserves or by using open market operations to increase the short term federal funds interest rate.

But did Greenspan really expect interest rates to remain permanently at 1 a negative real interest rate? Did he not think about what would happen to poor Americans with variable rate mortgages if interest rates rose, as they almost surely would?