Policy rate

The short-term interest rate a central bank sets

In detail

The policy rate is the short-term interest rate a central bank sets while watching growth and prices. Raising it makes borrowing dearer and cools the economy; cutting it does the opposite. Bond prices and exchange rates move on the expected path of this rate alone. In equities, higher rates discount future profits more heavily, which weighs most on companies valued for growth.

Example

A move from 0.25% to 0.5% raises the interest on floating-rate borrowing accordingly.

Related terms

Interest rate risk Yield curve Inflation

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