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What does the Bank Rate 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 its bank 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, the Bank Rate is the most important tool that a central bank has in its tool box to help guide the macro-economy.

The Bank of England on Threadneedle Street in London

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 percent which is very low by historical standards. A year ago the rate stood at 0.75 percent. Inflation is currently extremely low at 0.5 percent.

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

The Federal Reserve in Washington DC

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

The Bank of Jamaica in downtown Kingston

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



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