Interest rate

The amount a borrower pays a lender for the use of money for a period, expressed as a percentage of the sum borrowed. A currency has many of them at once rather than one. The policy rate is set administratively by a central bank for lending between banks overnight. Money market rates are what banks actually charge each other. Government bond yields are the rates the state borrows at across a range of maturities, and retail rates sit above all of these.

The policy rate is decided by a committee at scheduled meetings and moved in steps, while every other rate in the currency is set by supply and demand for lending at each maturity. Plotting those rates against their maturities gives the yield curve, whose shape summarises what the market expects the policy rate to do. A nominal rate is the number quoted, and a real rate is roughly that number less the rate of inflation over the same period, which is the version that determines whether a lender gains purchasing power.

For a currency position what matters is not either rate alone but the difference between the two currencies' rates, since that difference is what an overnight adjustment on the pair is calculated from. It is also the expectation rather than the level that moves prices: rates are known and already reflected in quotations, so a decision that matches what was expected commonly produces less movement than a change in the language accompanying it.