Economy
Interest Rate (Policy Rate)
Definition
The rate set by a central bank at which commercial banks can borrow money, which in turn influences all other interest rates in the economy.
Explanation
When a central bank raises interest rates, borrowing becomes more expensive, slowing spending and investment — which helps control inflation. When rates are cut, borrowing is cheaper, stimulating economic activity. The US federal funds rate, ECB deposit rate, and Bank of England base rate are the most watched policy rates globally. Near-zero or negative interest rates were common in the 2010s but were abandoned during the post-pandemic inflation surge.