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

DMO

The United Kingdom Debt Management Office. It’s an executive agency responsible for managing the government’s debt and cash needs, primarily through issuing gilts and Treasury bills.

Net Income (NI)

The money a firm is left with from sales after subtracting taxes and different business costs.

Retail Prices Index (RPI)

An index published each month by the Office for National Statistics, which measures the level of retail prices in the UK. Cash flows on all index-linked gilts are linked to the RPI.

Yield curve

A graphical representation of interest rates over time

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An ETF that that reproduces the return of an index through the use of swaps.

Diversification

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

Time-Weighted Rate of Return (TWRR)

A return calculated over the time period invested, that excludes extraneous elements, such as deposits to and withdrawals from the investment accounted.

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Base rate