Interest rates: how the price of money is set and reaches you
An interest rate is the price of money: what borrowing costs you and what saving pays you. The rate on your mortgage, your car loan or your savings account is not really set by your bank alone. It sits downstream of a handful of rates that a central bank decides on purpose, and when those move, the price of money moves through the whole economy to reach you.
Who turns the dial
Most of the rates you meet trace back to a central bank steering the cost of money to keep prices stable. In the euro area, that job belongs to the European Central Bank. According to the ECB’s own explainer of what interest rates are, its Governing Council sets three key rates roughly every six weeks, and each one prices a different piece of the banking plumbing.
The first is the main refinancing operations rate: what commercial banks pay to borrow from the ECB for a week. The second is the marginal lending facility rate, the cost of borrowing overnight. The third is the deposit facility rate, what banks earn for parking money at the ECB overnight. Together these set the floor and ceiling for what banks charge each other, which is why a decision made in Frankfurt eventually shows up on your loan statement.
The ECB is the worked example here because the euro is our working currency, but it is not unusual. Other central banks around the world run the same machinery on their own currencies and their own timetables.
How a decision reaches you
When the key rates change, banks reprice, and the effect on a real loan is easy to feel. Take a €300,000 mortgage over 30 years. At 4% it costs €1,432.25 a month. A quarter-point rise to 4.25% adds €43.57 a month, taking it to €1,475.82. A full point, to 5%, adds €178.21 a month and roughly €64,158 over the life of the loan.
Saving works the same way in reverse. Put €10,000 away for five years and at 2% it grows to €11,051; at 3% it grows to €11,616. That single extra point earns you €565.
What the rate does depends on inflation, because what matters is the real return, the rate minus inflation. A 3% rate is worth 0.98% in real terms when inflation runs at 2%, but minus 1.9% when inflation runs at 5%: the money still grows, yet buys less than before.
What you can do from here
From here you can work out what a rate change does to your own mortgage, see how a savings rate compounds over time, and follow how inflation quietly rewrites the real value of both.
Interest rates explain how money is priced, not what you should do about it. Where a personal borrowing or saving decision carries real stakes, a professional adviser is the right person to weigh it.
Last reviewed 7 July 2026
Calculate it
Understand it
Transmission, in euros: what a quarter-point does to a €300,000 mortgage and what a full point does to savings.
Guide What is an interest rate?The price of money: what a rate actually prices, who pays whom, and why one economy has many rates at once.
Guide How central banks set interest ratesThe ECB’s three key rates, the six-week rhythm, and what a central bank is actually steering when it moves them.
Guide Why interest rates rise and fallRates move because inflation moves: the steering logic, and why the real rate is the number that decides behaviour.
Guide APR vs APYKnow why APY often differs from the stated APR.
Guide Fixed vs Variable Interest RatesCompare rate stability versus potential savings or risk.
Guide Real vs Nominal Interest RatesLearn how inflation changes the real value of interest rates.
Guide The Yield CurveUnderstand normal, flat, and inverted yield curves.
Guide What Are Negative Interest RatesFind out how saving can cost you and lending can pay you.
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See it in numbers
Key terms
Follow the rabbit hole
One idea leads to the next. Start anywhere.
- What is compound interest?A plain explanation of compound interest, why it accelerates, and why it matters for anyone saving or borrowing.
- How compound interest worksThe four moving parts — principal, rate, frequency and time — and how each one changes what you end up with.
- The compound interest formula, explainedWhat FV = P(1 + r/n)^(nt) actually says, term by term, with a worked calculation you can follow.
- The Rule of 72A mental shortcut for how long money takes to double — how it works, how accurate it is, and where it breaks down.
- Compound interest and inflation: real returnsWhy the growth you see is not the growth you get, and how to think about returns after inflation.
- Why compound interest makes pensions workHow decades of compounding do most of the work in a pension, and why starting earlier beats contributing more.
Questions people ask
Did Einstein really call compound interest the eighth wonder of the world?
There is no credible evidence Einstein said it. Researchers at Quote Investigator traced the "eighth wonder of the world" attribution and found it appearing decades after his death, with no source in his own writings. Treat it as apocryphal: the maths is impressive enough without the celebrity endorsement.
What is a realistic interest rate to assume?
It depends entirely on what the money is in: deposit accounts, bonds and shares behave differently, and Around doesn't predict markets. Our worked examples use a 3% to 7% range purely to show how the maths responds to different rates.
Who sets interest rates?
Central banks set the key interest rates for their currency. In the euro area, the ECB's Governing Council sets three key rates roughly every six weeks as part of its job of keeping prices stable, as the ECB's own explainer describes. The rate you're personally offered on a mortgage or savings account is a commercial rate set by your bank, but it takes its cue from those central bank decisions.
What are the ECB’s three interest rates?
The ECB's three key rates are the main refinancing operations rate, the rate banks pay to borrow from the ECB for a week; the marginal lending facility rate, for overnight borrowing; and the deposit facility rate, for overnight deposits, as set out in the ECB's own explainer. All three move together at the Governing Council's roughly six-weekly meetings, though by not always the same amount. Their current levels are published by the ECB and change over time, so any specific figure should be checked against the latest ECB release.
How does an interest rate rise affect my mortgage?
A rate rise increases the repayment on variable and tracker mortgages once lenders pass it on, while a fixed rate only feels the change when the fixed period ends and it's time to renew. On a €300,000 mortgage over 30 years, a quarter-point rise adds €43.57 to the monthly repayment, and a full percentage point adds €178.21. The size of the jump depends on the outstanding balance and the years left to run, so a smaller or shorter loan moves by less.
Do savings rates follow central bank rates?
Broadly yes, savings rates tend to move in the same direction as central bank rates, but usually more slowly and less fully than borrowing rates do. This is a widely observed pattern rather than a fixed rule, since individual banks decide what to pass on and when. The difference compounds in real money: €10,000 saved over 5 years earns €565 more at one percentage point higher interest.
What is compounding?
Compounding is what happens when the returns something earns start earning returns of their own. Each period, the growth is added back to the base, so the next period's growth is calculated on a slightly larger amount than the last. Because that base keeps widening, the total builds faster the longer it runs, and the effect strengthens the more often the returns are added. The same mechanism works in reverse for debt, where unpaid interest itself begins to accrue interest.