Bank Rate is the interest rate at which a country’s central bank lends money to commercial banks for long-term purposes without collateral.
Bank Rate is an important monetary policy tool used by a central bank to control liquidity and inflation in the economy. When commercial banks face a shortage of funds, they can borrow from the central bank at the bank rate.
If the central bank increases the bank rate, borrowing becomes more expensive for commercial banks. As a result, banks may increase interest rates on loans and advances, which can reduce borrowing and slow down inflation. On the other hand, if the bank rate is reduced, loans may become cheaper, encouraging borrowing and economic growth.
Bank Rate is different from the repo rate. Repo transactions involve short-term borrowing against government securities, while bank rate generally applies to long-term lending without repurchase agreements.
Changes in the bank rate influence overall interest rates in the economy, including personal loans, home loans, and business loans.
"If the central bank increases the bank rate from 6% to 6.5%, commercial banks may increase lending rates to customers, making loans more expensive."