Difference Between Equilibrium & Market Rate of Interest
- The equilibrium interest rate is that point at which the demand for money by borrowers is equal to the supply of money from lenders. Central banks, such as the Federal Reserve, use the equilibrium rate to control the supply of money, which in turn allows them to have some control over the growth of the economy. When there is more demand for money than money available to lend, interest rates rise until the demand is reduced and is once again equal to the supply. When there is less demand for money, rates fall until the demand picks up and the demand is equal to the supply.
- The market interest rate relates to both deposits and loans. The market interest rate for cash deposits is the most common offered rate, based on the amount and the term of the deposit. This is similar to the market rate for loans, which is also based on the term of the loan and whether it is secured. Rates on deposits are also related to the supply and demand of deposits. Loan rates are based on the supply of credit.
- The equilibrium interest rate is similar to the market interest rate, in that both are driven by the marketplace and the demand for money. However, the equilibrium rate is generally used by central banks to regulate the pace of the economy of a country, while the market interest rate typically relates to commercial lenders and banks.