Rediscount Rate
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.[1]
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.[1]
Use as a policy tool
| 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.[1]
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.[1]