Bank rate

Bank rate, also known as the discount rate in American English, is the rate of interest which a central bank charges on its loans and advances to a commercial bank. The bank rate is known by different terms in different markets, such as discount rate, policy rate, and repo rate. The bank rate is a critical tool of monetary policy and is taken into account when dealing with variables like inflation or an economic recession.

Overview

The central bank uses the bank rate to control the supply of money in the economy. When the bank rate is increased, borrowing from the central bank becomes more expensive. Consequently, commercial banks increase their own interest rates to maintain profitability. This makes borrowing more expensive in the wider economy, reducing spending and thus controlling inflation.

Conversely, if the economy is in a recession, the central bank can lower the bank rate. This makes borrowing cheaper, encouraging spending and investment to stimulate economic growth.

History

The concept of bank rate has been in existence since the 19th century and has evolved over time. The Bank of England was the first to establish such a rate in 1839. The bank rate was used as a tool to manage the gold standard. In the 20th century, as economies became more complex, the bank rate became a critical tool of monetary policy.

Global Use

Different countries use the bank rate in different ways. For example, the Federal Reserve in the United States uses the discount rate, which is the equivalent of the bank rate. The European Central Bank uses a system of three different interest rates, of which the marginal lending rate is most similar to the bank rate.

See Also

• Central bank
• Monetary policy
• Inflation
• Economic recession
• Federal Reserve
• European Central Bank

References

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