Final answer:
Interest rates set by commercial banks are influenced by monetary policy, supply and demand, and the risk and creditworthiness of borrowers.
Step-by-step explanation:
The interest rates set by commercial banks are influenced by several factors. The three factors which influence interest rates are:
- Monetary policy: The central bank uses tools like open market operations, reserve requirements, and discount rates to control interest rates. For example, when the central bank lowers the discount rate, commercial banks can borrow at lower rates, leading to lower interest rates for borrowers.
- Supply and demand: The forces of supply and demand in the lending and borrowing markets can also affect interest rates. If there is high demand for loans and limited supply, interest rates may increase. Conversely, if there is low demand and abundant supply, interest rates may decrease.
- Risk and creditworthiness: Commercial banks consider the creditworthiness and risk profile of borrowers when setting interest rates. Borrowers with high credit scores and lower risk may be offered lower interest rates, while those with lower credit scores and higher risk may be charged higher interest rates.