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How do central banks set interest rates?

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Quick answer

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.

Step by step

  1. Central banks set a key benchmark interest rate.
  2. Raising rates cools inflation by slowing borrowing.
  3. Cutting rates stimulates a weak economy.
  4. The benchmark shapes loan, mortgage, and savings rates.

People also ask

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.