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Base rate definition
A base rate is the benchmark interest rate that a central bank sets as the starting point for borrowing and saving across an economy. Lenders price their own products from it, so it shapes the cost of money system-wide.
Commercial banks use the base rate to help set the rates on loans, mortgages, credit cards, and savings products. When the central bank raises the base rate, borrowing costs usually climb. When it cuts the base rate, borrowing costs usually ease. The rate then flows through to consumer spending, business investment, inflation, currency values, and bond yields.
A base rate is not the rate a borrower actually pays. Lenders add a margin on top, so a loan priced at 'base rate plus 2%' costs more than the base rate alone. Different countries name their base rate differently: the Bank of England calls it the Bank Rate, while the US equivalent is the federal funds rate.
Base rate Example
A central bank raises its base rate from 4.50% to 4.75%.
Banks may lift their loan and mortgage rates in response, because their own funding has become more expensive.
Traders may treat the increase as supportive for the local currency, since a higher rate can make that currency more attractive to hold.
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