What is the 'base rate'? Definition & meaning

What's the base rate?

The "base rate" typically refers to the interest rate that a central bank, like the Bank of England or the Federal Reserve in the United States, sets and uses as the primary tool for controlling monetary policy. This rate is crucial because it influences the cost of borrowing money throughout the economy.

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The rate set by a central bank can influence the cost of borrowing for others in an economy. This has the knock-on effect of either encouraging or slowing economic activity.

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Central banks use the base rate to try to control factors like inflation. Changes in the base rate can also influence the valuation of a country’s currency in relation to other currencies.

More terms

Diversification

An investment strategy in which money is put into a variety assets.

Junk Bond

A form of debt investment that carries higher risk because of the likelihood that the issuer will default.

Arithmetic Mean

The sum of a set of numbers added together and then divided by the total amount of numbers in that set.

Volatility

A measure of how much the prices of an asset or index vary over time.

Equity ETF

An exchange-traded fund that is comprised of a set of stocks.

Alpha

The percentage by which an investor outperforms a relevant benchmark.

Costs and Charges

The money you pay when investing.

Xetra

A trading venue operated by the Frankfurt Stock Exchange.

Oligopoly

A situation in which a market or industry is controlled by a small group of companies.

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Base rate