6.
Explanation
The term “bank rate” refers to the interest rate at which a central bank lends money to commercial banks within a country’s financial system. It is one of the tools that central banks use to influence monetary policy and manage the overall economy. Here are some key points about the bank rate:
1. Policy Tool: Central banks use the bank rate as a policy tool to control the money supply and influence the broader economy. By changing the bank rate, central banks can encourage or discourage borrowing and lending among commercial banks.
2. Lender of Last Resort: The central bank serves as the lender of last resort, providing a source of liquidity to commercial banks in times of financial stress or when they face a shortage of funds.
3. Impact on Interest Rates: Changes in the bank rate can have a ripple effect on interest rates throughout the financial system. When the central bank lowers the bank rate, it becomes cheaper for commercial banks to borrow from the central bank, which, in turn, can lead to lower interest rates on loans for businesses and consumers. Conversely, raising the bank rate can have the opposite effect, making borrowing more expensive.
4. Inflation Control: Central banks use the bank rate as a tool to control inflation. Higher bank rates can reduce the money supply and slow down economic activity, which may help control inflation. Lowering the bank rate can have the opposite effect, stimulating economic growth.
5. Economic Stabilization: The bank rate is a mechanism for central banks to stabilize the economy. During economic downturns, central banks may lower the bank rate to encourage borrowing and investment. During periods of overheating or high inflation, they may raise the bank rate to cool
down economic activity.
6. Signal to Financial Markets: Changes in the bank rate are closely watched by financial markets, economists, and investors because they can provide insights into a central bank’s monetary policy stance and expectations for the economy.