What is a base rate in financial terms?

A base rate in financial terms refers specifically to the interest that central banks pay to commercial banks for the reserves that the banks hold at the central bank. This rate is a key monetary policy tool that influences the cost of borrowing and the overall money supply in the economy. When the base rate changes, it can have a ripple effect on the interest rates that banks offer to consumers and businesses for loans, thereby affecting economic activity.

This definition underscores the role of the base rate as a foundational component in the financial system, guiding the lending practices of commercial banks and impacting interest rates across the economy. It serves as a benchmark for determining other interest rates, influencing investment and consumption decisions. Understanding this concept is essential for grasping broader monetary policy and its effects on financial markets.