The economy
Interest rate
Also called Policy rate or Base rate
The cost of borrowing money, set at the short end by the central bank.
How it works
The policy rate is the rate at which banks borrow overnight. Everything else — mortgages, corporate debt, savings accounts — prices off it plus a margin for term and credit.
Rates matter to asset prices through the discount rate: higher rates make future cash flows worth less today, and hit long-dated growth assets hardest.
Related terms
- Central bankThe institution that sets a country’s benchmark interest rate and manages its money supply.
- Discount rateThe rate used to convert future money into what it is worth today.
- Yield curveA chart of government bond yields across maturities, from months to decades.
- DurationHow much a bond’s price moves when interest rates change, expressed in years.
- Real returnReturn after subtracting inflation — the only measure of whether you got richer.
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