- Category: Banking
- Written by Paul William
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What is Bank Rate or Discount Rate ?
Bank Rate or Discount Rate is the rate of interest charged by the Federal Reserve Bank or the Central Bank of a country while lending to commercial banks. Bank rate is the one of the KPIs in economy of any country. Inflation is one of the major factor for the change in bank rate. It changes as per the requirement and as per the government policy.
Bank Rate is decided by FED (Federal Reserve System) which is governed by Board of Governors appointed by the President of United States of America. There are 12 regional reserve banks in america. Federal Open Market Committee is formed by 60 representatives of these banks whose responsibility is to look after open market strategies. Bank rate or Discount rate depends on the market and not supremely by FED. Savings, bank loan and mortgage rates indirectly depends on the Discount Rate set by FED which in turn depends on market.
Discount rate changes everyday, in order to check the current or past discount rate you can visit https://ycharts.com/indicators/us_discount_rate
In nutshell, when the commercial banks are short of funds they do take loans from the Federal Reserve Banks which are located different districts. The interest charged is called the discount rate. If inflation is high, discount rate will increase and vise versa.
Discount Rate can alter the below listed points :
- Condition of credit in economy of a country
- Interest rates of loans, savings, mortgages etc.
- Payment deficits
- Flow of cash in the market.
There are three discount rates :
Primary Discount Rate - There are certain criteria which a commercial bank has to fulfill in order to borrow at FED's window or Federal Reserve Banks. Primary Credit Rate is the lowest one with higher requirements as in total assets of the bank, securities etc.
Secondary Discount Rate - The banks which could not fulfill all the criteria of primary falls under secondary and the rate of interest is increased by 0.5%. Secondary = Primary + 0.5%
Seasonal Discount Rate - It constitutes all small and community banks. This rate is a part of programs to enhance small scale business, farmers, students etc.