What Is the Bank Rate? What Does It Do?

The Bank Rate is the rate at which a country’s central bank lends to commercial banks in that country. So it is the rate that other banks in that country use to decide their own lending and borrowing rates.

The central bank uses the rate as a tool to manage economic activity in the country in an effort to keep the economy at the rate of inflation targeted by the government.

The lower the rate, the easier it is for consumers to borrow money, therefore increasing the level of economic activity. Conversely, the higher the rate, the less affordable it is to borrow money, decreasing economic activity and helping to decrease the inflation rate.

A lower rate means that consumers will earn on their savings but will also be able to borrow at a lower rate — thereby promoting spending and an increased level of inflation A higher rate will mean a higher savings rate but also a higher rate on mortgages and car loans and other types of loans — which will depress spending and potentially decrease.

The rate determines the rate consumers pay to commercial banks on loans or earn as interest on savings. With it, the central bank can either grow or contract the economy.

As such, it is the most important tool that a central bank has in its toolbox to help guide the macroeconomy.

The UK

In the UK, this rate is sometimes called the ‘Bank of England base rate’ by the media or even just ‘the interest rate’.

In the case of the UK, the rate is set by the Bank of England’s Monetary Policy Committee (MPC).

The current Bank Rate for the UK is 0.1 per cent which is very low by historical standards. A year ago, it stood at 0.75 per cent. Inflation is currently extremely low at 0.5 per cent.

The USA

In the United States, the Bank Rate, also known as the Federal Fund Rate, is also low, at 0.25 per cent — but still higher than in the UK. One year ago, the rate was 2.25 per cent. The Fed is expected to keep rates very low for the foreseeable future

the developing world

In the developing world, because inflation is usually much higher, the Bank Rate also tends to be higher.

In Jamaica, for example, the Bank of Jamaica’s Bank Rate— or Policy Interest Rate as it is known — is currently at 0.5 per cent — extremely low by Jamaican historical standards. but still five times more than the UK rate. Inflation, while historically extremely low at 5.7 per cent, is still much higher than in the UK. One year ago, the rate was still at 0.5 per cent.