Policy Rate

Central banks do not lend to every household or business directly. Instead, they set a single administered rate — often an overnight rate for lending between commercial banks — and market forces transmit it outward. Mortgages, car loans, savings accounts, and corporate bonds all price themselves relative to this anchor. Because it is set by decision rather than by market supply and demand, it is called an "administered" rate.

Different central banks give their policy rate different names. The US Federal Reserve targets the federal funds rate; the European Central Bank sets a deposit facility rate; the Bank of England uses the Bank Rate. Despite different names, they serve the same function: signal how tight or loose monetary policy is. Economists read a rising policy rate as an attempt to cool inflation, and a falling one as stimulus for a slowing economy.

Traders typically watch policy-rate decisions closely because the rate ripples into currency values, bond yields, and equity valuations almost immediately. Suppose the policy rate rises from 2% to 2.25%; that quarter-point move reprices trillions of dollars in floating-rate debt overnight. Rate decisions and their scheduled announcement dates appear on the economic calendar, and their effect on currencies is covered in central banks and currencies.