What are short-term interest rates?

Short-term interest rates are like the price you pay to borrow money for a little while.

Imagine you have a piggy bank full of coins, and your friend wants to borrow some coins from you for just a few days. You say, "Okay, but I want a little extra coin as thanks." That extra coin is like interest, it’s the cost of borrowing money. If your friend borrows money for only a short time, like one week or one month, that's what we call short-term.

Think about when you go to the store and use a credit card. If you pay off your credit card balance quickly, say, in a few weeks, you might not get charged much interest. That’s because short-term interest rates are usually lower than long-term ones.

Banks also use short-term interest rates when they borrow from each other. They might lend money to another bank for just one day or one week, and that's where the rate comes in. It's like a tiny, quick loan between friends, but with bigger numbers!

So next time you see something about interest rates, remember: it’s just how much extra you pay (or get) when borrowing or lending money for a short period of time.