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What is a Bank Rate?

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  • Written By: Mary McMahon
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 September 2016
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The bank rate is the interest rate which is used when a central bank such as the Federal Reserve System loans money to national banks. Changes in the bank rate have an impact on the amount of available money in a nation, and these rates are set by the central bank as part of an overall effort to keep economies healthy and stable. The bank rate is often set on a quarterly basis, and changes in the bank rate are usually a topic of immense interest to economists and the general financial community. Consumers are also impacted by the bank rate, as fluctuations in the bank rate may change the interest rates that they in turn receive for loans.

A central banking system serves as a backup for national banks to ensure that the banking system in a country does not fail. The central bank is sometimes treated as a lender of last resort, and it may inject supplies of cash into a struggling economy. Central banks typically set monetary policies, and they supervise banking to ensure that banks behave professionally and responsibly. Central banks change the bank rate to control inflation and exchange rates.

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When the bank rate is low, it encourages national banks to apply for loans, thereby increasing the available supply of money in the banking system. A high bank rate, on the other hand, discourages lending, restricting supplies of cash. By altering the bank rate, the central bank can try to control inflation and the associated economic problems. The bank rate may also be referred to as a “discount rate,” in a reference to the fact that national banks flip their discounted loans quickly to consumers at a higher rate in the hopes of making some money on the transaction.

When the central bank announces a new bank rate, it can have a radical impact on the economy. Stock markets may rise and fall dramatically in the wake of an interest rate announcement, so trading tends to be particularly tense on a day when a new bank rate is expected. In stock markets which still use trading floors, an eerie silence can precede the announcement of a bank rate, followed by frenzied trading as people jockey for an advantage.

Consumers should pay attention to the bank rate because it can influence the interest rates on their personal loans and lines of credit. It is also an excellent idea to compare rates of interest across different banks, whether consumers are considering new home loans or the possibility of depositing money into an interest bearing account.

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