Bank Rate

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DEFINITION of 'Bank Rate'

The interest rate at which a nation's central bank lends money to domestic banks. Often these loans are very short in duration. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity. Lower bank rates can help to expand the economy, when unemployment is high, by lowering the cost of funds for borrowers. Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired.

The bank rate can also refer to the interest rate which banks charge customers on loans.

BREAKING DOWN 'Bank Rate'

In the U.S., the bank rate is often referred to as the federal funds rate. The bank rate is set indirectly by the Federal Open Market Committee (FOMC) which buys or sells treasury securities to regulate the money supply. These actions serve to push the effective federal funds rate closer to the targeted rate. Regulation of the economy through management of the money supply is referred to as monetary policy.

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