Each country has a bank or discount rate, which is the interest rate set by a central bank for loans and advances to control money supply in the economy and the banking sector. In the UK, bank rates are decided by the Bank of England's Monetary Policy Committee.
The knock on effect of any changes to a country's bank rate can be felt through the whole economy, from stock market prices to mortgages and personal loans. When a central bank decreases the set bank rate, commercial banks have more incentive to borrow, therefore the money supply is increased. This reverse principle applies when the bank rate is increased.
Usually any changes are decided on a quarterly basis and can help control inflation and maintain or improve the economy, as well as stabilising the country's exchange rates.
Types of Bank Rates
Savings account bank rate
A lower rate is charged on funds that are deposited in these types of savings accounts. However, investors have ongoing access to their deposits, being able to withdraw them again at leisure.
Certificates of deposit (CD) bank rate
Compared to savings accounts, CDs offer comparatively high interest rates. Bank rates are determined by the term period of a deposit and the current economic situation. The longer the term of a CD, the higher the bank interest rate.
Money-market funds bank rate
Because most of the money-market accounts are privately insured, this is a secure method of investment. However, the flip side is that interest rates on money-market funds are relatively low and are generally utilised by those looking to generate short-term investments.
For further information, speak with a qualified Holborn Assets adviser today.