What is the Difference Between Bank Rate and Base Rate?

The key difference between the bank rate and the base rate lies in the financial institutions that decide them and their purposes. Here is a comparison of the two:

Bank Rate:

• The bank rate is decided by the central bank of an economy to control the money supply.
• It is the interest rate at which a nation's central bank lends money to domestic banks, often in the form of very short-term loans.
• Managing the bank rate is a method by which central banks affect economic activity. Lower bank rates can help expand the economy by lowering the cost of funds for borrowers, and higher bank rates help reign in the economy when inflation is higher than desired.

Base Rate:

• The base rate is the rate at which commercial banks lend funds to the public.
• It is the interest rate that a central bank, like the Bank of England or Federal Reserve, will charge to lend money to commercial banks.
• The base rate influences the interest rates set by other banks and financial institutions. When the base rate is low, banks can offer lower interest rates on loans to customers, encouraging spending and boosting the economy.

In summary, the bank rate is decided by the central bank and is used to control the money supply, while the base rate is decided by commercial banks and serves as a benchmark for their lending rates to the public. Both rates play a crucial role in managing economic activity and inflation.

Comparative Table: Bank Rate vs Base Rate

The bank rate and base rate are both interest rates used by central banks to influence economic activity. Here is a table highlighting the key differences between the two:

In summary, the bank rate is the interest rate at which a nation's central bank lends money to domestic banks, while the base rate is the rate set by the BoE for the UK and can influence the interest rates set by financial institutions. Both rates are used to manage economic activity and influence borrowing costs and savings rates.