Base rate / Central bank base rate / Key policy rate

The base interest rate is the tool of the central bank of the given country to influence the general interest rate. This is the interest rate at which banks can place deposits with the central bank and borrow from it.

The base rate, or the reference interest rate, is the interest level at which commercial banks can place deposits or credit they can take the from the central bank. The so-called interest corridor is the difference between the central bank deposit interest and credit interest.

The base interest rate is usually determined by the central bank's competent body, the monetary council, in accordance with inflation and the general state of the economy. The primary task of monetary councils is to inflation channeling it towards a predetermined level (the inflation target). 

The low interest it is beneficial for the economy as it facilitates borrowing, which provides growth opportunities for households, businesses and the state alike. Of course, this also brings with it an increase in consumption, which in turn results in increasing inflation, which is why the central bank raises interest rates in such cases. This is the usual cycle of things. 

The reduction of the base interest rate is therefore a means of monetary easing and of stimulating the economy. The increase in the base rate is part of monetary tightening. In addition to changing the base interest rate, central banks can use other tools to control the amount of money available. Such a asset can be, for example government securities buying or selling or changing the reserve ratio required for banks. 

In the case of the euro (EUR), the benchmark interest rate is determined by the European Central Bank (ECB), and in the case of the US dollar (USD) by the Federal Reserve (Fed).