But structured deposits for example, deposits whose rate of return is linked to the performance of the New York Stock Exchange are becoming increasingly popular.

As a result, the interest rate for 12 month fixed deposits has reached 3.9 .

Under the current system, the fixed differentials between interest rates on deposits and those on loans translate into monopolistic profits for commercial banks.

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

Second, China s central bank still controls interest rates by enforcing a roughly three percentage point spread between deposit rates and lending rates.

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 .

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

When the economic recovery begins to accelerate, commercial banks will want to use the large volume of reserves that the Fed has created to make loans to businesses and consumers.

The interest rate on these totally safe and liquid deposits induced the banks to maintain excess reserves at the Fed instead of lending and creating deposits to absorb the increased reserves, as they would have done before 2008.

Likewise, increasing the interest rates paid on bank deposits would enable savings to decline without loss of income.

So will lower inflation, which raises real returns on bank deposits.

Low interest rates on deposits encourage savers, especially households, to invest in fixed assets, rather than keep their money in banks.

Bank interest rates on savings are lower than the inflation rate and many multiples lower than the rates promised by the informal sector.

That is because an increase in the inflation rate causes interest rates on new debt to rise by an equal amount.

Interest rates were cut by presidential decree to below the inflation rate.

In the last month alone, Australia, India, Mexico, and others have cut interest rates. China has reduced reserve requirements on banks.

In 2012, the People s Bank of China allowed commercial banks to float interest rates on deposits upward by 10 from the benchmark, and on bank loans downward by 20 .

Japan s ability to sustain high fiscal deficits, low interest rates, and net capital exports has been possible because of its high private saving rate, which has kept national saving positive.

One reason for a rise in the interest rate would be a shift from low deflation to low inflation.

So, if the PBOC sets the interest rate on one year deposits at 3 , commercial banks can offer depositors a rate as high as 3.3 .

At 6.5 , the one year lending rate is now 0.3 above August s headline inflation rate.

Likewise, the Bank of England keeps its policy rate at only 0.5 , despite an inflation rate that hovers above 2 .

A direct effect of the higher interest rate would be to increase the budget deficit and the rate of growth of government debt.

A similar lockup is done in the United States when the Federal Reserve Board is preparing to adjust an interest rate.

It created federal insurance for bank deposits.

Glass, for his part, opposed deposit insurance.

Higher inflation would cause the interest rate on new debt to rise in a way that prevents the erosion of the real value of the total debt.

In 1985, the interest rate on ten year Treasury bonds was 10 , even though inflation had declined to less than 4 .

So, if inflation is low and stable, central banks cannot be blamed for low long term rates.

But, even after disinflation in the mid 1980 s, long term interest rates remained relatively high.

The result in Japan would then be rising real interest rates as the low private saving rate runs head on into large fiscal deficits.

A higher rate of expected inflation would also cause the total nominal rate to be greater than 5 .

Italy and Spain would then be able to refinance their debt at close to the ECB s deposit rate, which is currently 1 on mandatory reserves and 25 basis points on excess reserve accounts.

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.

With unemployment now at 7.6 and falling only slowly, the Fed may not be ready to raise the federal funds rate until 2015.

The capital would be repaid in annual installments as the funds become available through the EU budget, while the national co financing rate would apply to interest payments.

Greece is caught in a classic debt trap, as the interest rate on its public debt has soared beyond its growth rate by a considerable margin Spain is teetering on the brink.

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.

So the Fed could, in principle, decide to raise the federal funds rate even before the unemployment rate reaches 6.5 .

The European Central Bank s policy rate stands at 0.75 , while the eurozone s annual inflation rate is 2.5 .

In October, the People s Bank of China, responding to the twin threats of inflation and asset bubbles, raised its one year deposit and lending rates by 25 basis points, to 2.5 and 5.56 , respectively the first increases since 2007.

After flirting with disaster last July, interest rate spreads for eurozone bonds have generally been subdued, and financial segmentation has been slowly reversed (that is, at least before European officials embarked on the controversial path of trying to impose losses on guaranteed bank deposits in Cyprus).

That expected inflation rate is consistent with the difference in interest rates between ordinary US government bonds and Treasury Inflation Protected Securities.

The current small difference between the real interest rate on such bonds (2.1 for 30 year bonds) and the nominal interest rate on conventional 30 year Treasury bonds (now 4.6 ) implies that the market expects only about 2.5 inflation over the next three decades.

The greatest risk to bond holders is that inflation will rise again, pushing up the interest rate on long term bonds.