The base rate is the minimum interest rate set by a central bank, such as the Bank of Canada or the Bank of England. It serves as the foundation for the rates banks and lenders charge their customers.
How It Works
Commercial banks use the base rate as a reference point when setting their own lending and savings rates. When the central bank raises or lowers the base rate, borrowing and saving rates across the economy typically adjust in the same direction.
Why It Matters
- For borrowers: Changes in the base rate affect loan costs, including mortgages, credit lines, and business loans.
- For savers: Deposit rates and returns on savings accounts are tied to base rate movements.
- For the economy: Base rate adjustments are a primary tool for controlling inflation and economic growth.
Final Thoughts
The base rate is a crucial benchmark that shapes borrowing costs, saving returns, and overall economic activity. Understanding its role helps borrowers and investors anticipate changes in financial conditions.