Definition of 'Key Rate'
The key rate is set by the central bank's monetary policy committee. The committee meets regularly to review economic conditions and make changes to the key rate. When the committee raises the key rate, it makes it more expensive for banks to borrow money, which in turn makes it more expensive for businesses and consumers to borrow money. This can slow down economic growth and reduce inflation.
When the committee lowers the key rate, it makes it cheaper for banks to borrow money, which in turn makes it cheaper for businesses and consumers to borrow money. This can stimulate economic growth and reduce unemployment.
The key rate is an important tool for central banks to manage the economy. However, it is important to note that the key rate is not the only factor that affects economic growth and inflation. Other factors, such as government spending, tax policy, and consumer confidence, can also play a role.
Here are some additional details about key rates:
* The key rate is also known as the policy rate or the discount rate.
* The key rate is typically set in a range, rather than at a single point.
* The key rate is often used to target a specific interest rate, such as the federal funds rate or the prime rate.
* The key rate can be used to influence the exchange rate between the domestic currency and other currencies.
The key rate is a powerful tool, but it is important to use it carefully. If the central bank raises the key rate too quickly, it could cause a recession. If the central bank lowers the key rate too quickly, it could cause inflation.
Central banks must carefully monitor economic conditions and make changes to the key rate in a timely manner. This can be a difficult task, but it is essential for maintaining a healthy economy.
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