Base rate definition
The base rate, or base interest rate, is the interest rate that a central bank – like the Bank of England or Federal Reserve – will charge to lend money to commercial banks.
While they are free to set their own interest rates for borrowing, overall the rates charged on loans and offered on savings by commercial banks tend to be derived from the base rate. This allows central banks to use base rates to encourage or discourage spending, depending on the state of the economy.
In the years after the recession, for example, many central banks kept interest rates at record lows. This in turn led most commercial banks to charge low interest rates on loans to customers, but also offer low interest rates on money held in accounts. With the cost of borrowing low and the benefit from saving minimal, consumers should in theory be encouraged to spend money instead of saving it, giving a boost to businesses and the economy.
Central banks release regular statements detailing their policy on base rates.