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The '''rediscount rate''' (also called the '''discount rate''' in some countries) is the [[interest rate]] at which a [[central bank]] lends money to commercial banks, typically against the collateral of eligible securities or by discounting (purchasing) bills of exchange. It is one of the traditional instruments of [[monetary policy]].<ref name="wiki">Wikipedia contributors, "Discount window".</ref>

== Definition ==

The rediscount rate is the rate charged when a central bank extends credit to commercial banks. When a bank needs short-term funds, it can borrow from the central bank at this rate, using eligible assets as collateral. The rate is therefore the cost of obtaining liquidity from the central bank.<ref name="wiki"/>

== Use as a policy tool ==

{| class="wikitable"
! Action
! Effect
|-
| Raising the rediscount rate
| Makes central bank borrowing more expensive; contractionary.
|-
| Lowering the rediscount rate
| Makes central bank borrowing cheaper; expansionary.
|}

Because banks can usually borrow from each other in the [[interbank market]] at rates close to the policy rate, the rediscount rate is often set slightly above the market rate and functions as a ceiling on short-term interest rates. Its main role is to provide liquidity to banks facing temporary shortages and to signal the direction of monetary policy.<ref name="wiki"/>

== Related concepts ==

The rediscount rate is distinct from, but related to, other policy rates and instruments, including the [[Deposit Reserve Ratio]], [[Open Market Operations]], and, in modern central banking, the interest rate on reserves. In many economies, the rediscount rate has been supplemented or partly replaced by other facilities, such as standing lending facilities.<ref name="wiki"/>

== See also ==

* [[Monetary Policy]]
* [[Deposit Reserve Ratio]]
* [[Open Market Operations]]
* [[Central bank]]

== References ==

<references />

[[Category:Economics]]
[[Category:Monetary economics]]
[[Category:Banking]]