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MadMarketScientist

Discount Rate Definition

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The discount rate is one of the tools used by the central bank of a country to set the interest rates of a country. Commercial banks borrow money from the central bank periodically to enable them meet up their financial obligations and perform their banking operations. They pay an interest on this money and this is known as the discount rate. Banks now lend this money to other financial institutions and also to customers at rates that are slightly marked up from the discount rate. If the central bank increases the discount rate, this will in turn force banks to increase the rates at which they lend to customers and also to other financial institutions. Similarly, if the central bank reduces the discount rate, there will be simultaneous reductions in the commercial lending rates and fund rates.

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