This story is part of Re:’s Money Week, where we take a look at everything from asking your boss for a raise, to explaining what inflation actually is. Check out the rest of the stories here.

You may think interest only matters if you’ve borrowed money, but it actually affects the price of everything in the country.

You lend a mate $10 and say you want 11 bucks back tomorrow.

You’ve just charged them 10% interest.

Interest is how businesses who lend money - like banks or credit card companies - make profit.

But even if you’re not borrowing money, interest affects the price of everything in Aotearoa, because it’s the main way policy makers can affect how affordable things are.

This is done through the Reserve Bank, which is essentially our country’s bank.

The Reserve Bank lends money to banks at a set interest rate - called the official cash rate. 

The banks then lend you that money at a slightly higher interest rate.

Almost all businesses need loans to operate, so the amount of interest they need to repay will affect how much they will charge for the things you buy, like food, or the services you pay for, like rent.

Every six weeks, the Reserve Bank changes the official cash rate to try and balance what level will allow businesses to succeed with a rate that will keep products and services affordable for New Zealanders.

When interest rates are raised, people and businesses borrow less money and save more. With less people spending money, demand for goods and services decreases and prices go down as a result.

The immediate impact is that people and businesses make less big purchases, like property. This drops the price in areas like the housing market.

It takes longer, but eventually this leads to a decrease in the prices of most things in the market, including everyday items like food.

On the flipside, when interest rates are low, businesses and people are more likely to borrow money. This increases the demand for products and the amount businesses can charge for them.

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