Finance
How do central banks set interest rates?
Central banks set a key interest rate to steer the economy. To cool inflation, they raise rates, making borrowing costlier and slowing spending. To boost a weak economy, they cut rates. That benchmark ripples out to loans, mortgages, and savings everywhere.
See it in motion.
Watch a 2-minute animated lesson that shows exactly how interest rate policy works.
Step by step
- 1Central banks set a key benchmark interest rate.
- 2Raising rates cools inflation by slowing borrowing.
- 3Cutting rates stimulates a weak economy.
- 4The benchmark shapes loan, mortgage, and savings rates.
Frequently asked questions
- How do central banks set interest rates?
- They adjust a benchmark rate up to cool inflation or down to stimulate growth, guided by economic data.
- Why do central banks raise interest rates?
- To make borrowing costlier and slow spending when inflation is rising too fast.
- How do central bank rates affect me?
- They influence the rates on your loans, mortgage, credit cards, and savings accounts.