What is the Bank Rate? A Simple Guide

The bank rate is the interest rate at which the central bank lends longer-term funds to commercial banks, usually without requiring securities as collateral. It is a traditional policy tool that signals the central bank's stance. It is closely linked to other policy rates and affects lending costs.

The bank rate is one of the older tools of monetary policy, used to signal the cost of longer-term central bank lending to banks.

This guide explains what the bank rate is and how it relates to the repo rate.

Key Takeaways

• The bank rate is the central bank's longer-term lending rate.
• It usually needs no securities as collateral.
• It is a traditional policy signalling tool.
• It is closely linked to other policy rates.
• It influences the cost of lending.

What is the bank rate?

The bank rate is the rate at which the central bank lends to commercial banks, traditionally for longer periods and often without the collateral of securities that the repo rate requires. It has long been used as a benchmark signalling the central bank's policy stance and the general cost of borrowing.

How is it different from the repo rate?

The repo rate involves short-term lending against securities as collateral, while the bank rate traditionally involves longer-term lending, often without such collateral. In practice, the two are usually kept closely aligned, so they move together and both signal the direction of monetary policy.

How does the bank rate affect the economy?

When the bank rate rises, borrowing from the central bank becomes costlier, which tends to raise lending rates across the economy and cool activity. When it falls, borrowing becomes cheaper, supporting credit and growth. Its effect is similar in direction to the repo rate, reinforcing the policy signal.

Why is it still used?

Although the repo rate has become the main active tool for managing liquidity day to day, the bank rate remains as a longer-term signalling rate and is linked to certain penalty rates in the banking system. It is set by the central bank and changes over time, so check the current figure from official sources.

How is the bank rate linked to penalties?

The bank rate is the rate at which the central bank lends to banks for longer periods, and it also serves as a reference for certain penalties and default charges within the financial system. Because it is often set in line with the marginal standing facility rate, it sits at the higher end of the policy corridor. Its role today is more as a signalling and reference rate than as the main tool for day-to-day liquidity, which is handled through the repo rate.

Where does the bank rate sit among policy rates?

Among the various policy rates, the bank rate typically sits above the repo rate, reflecting longer-term or penal lending. The repo rate handles short-term liquidity, the reverse repo sets a floor, and the marginal standing facility and bank rate mark the upper end. Understanding where the bank rate fits helps make sense of the overall structure the central bank uses to guide interest rates, even though it is less actively adjusted than the headline repo rate.

Economic data, policy and rates change over time and affect markets in complex ways. This article is educational, uses figures for illustration only, and does not constitute investment advice.

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