Interest rates

Every six weeks, the Governing Council reviews the latest economic data to decide whether interest rates need to change. Want to know more about how ECB monetary policy works? Visit our monetary policy page. Below we explain how interest rates influence the economy.

What interest rates are, who sets them and how they affect you

Interest rates influence your daily life in many ways. They affect your savings, your mortgage, loans for businesses and even government finances. But what exactly is interest? And who decides the level of interest rates?

What is interest?

Interest is the cost of borrowing money, or the reward for saving it. Borrowers pay interest; savers receive it. You can see it as the “price” of money.

• If you take out a mortgage you pay mortgage interest.
• When an entrepreneur borrows money for new equipment they pay interest on that loan.
• And if you depositing money in a savings account you receive interest, because you are effectively lending money to the bank. 

Who or what sets interest rates?

The market

Interest rates are mainly driven by supply and demand.

• If many people are saving and few want to borrow, interest rates fall.
• If demand for loans rises, interest rates go up.

It works just like other products. Take beef, for example: if supply drops while demand remains high, prices of steaks and hamburgers go up. The same logic applies to interest rates.

Central banks

Central banks also play a major role. In Europe, the ECB sets policy rates. These are the interest rates banks pay when they borrow from the central bank, or receive when they deposit money there.

Policy rates do not directly apply to consumers and businesses, but they do influence the interest rates banks offer and charge. For example, if the ECB lowers policy rates, borrowing becomes cheaper for banks. This gives them room to reduce mortgage rates, for example, which benefits people taking out a new mortgage.

Policy rates affect:

• savings rates
• mortgage interest
• interest on business loans   

The term of a loan and the risks banks take also influence the interest rates they offer.

Interest rates affect the whole economy

Until 2022, interest rates were exceptionally low. This led to:

• very low returns on savings
• cheap mortgages
• low government borrowing costs for funding the budget deficit
• pension funds having to set aside more money for the future

From 2022 onward, the situation changed. Inflation rose sharply after the pandemic and due to the war in Ukraine the ECB reacted by raising interest rates in several steps. Borrowing became more expensive, while saving became more rewarding. As a result:

• savers receive more interest
• homebuyers pay more for new mortgages
• entrepreneurs face higher borrow costs
• governments pay more interest on their debts
• pension funds often benefit from higher interest rates

Inflation has since fallen significantly. Between June 2024 and June 2025, the ECB cut interest rates eight times, bringing them down to 2.00%.

The ECB’s task is to keep prices stable. If needed, it will adjust policy interest rates again.