Discount Rate Concept

Discount rate designates the interest rate charged by the Central Banks in the loans given to the commercial banks through the Open Market operations. Being established directly by the Central Bank, the Discount Rate forms an important instrument of monetary policy since it allows to regulate the currency offer and, consequently, influence the markets’ interest rates. For example, a reduction in the Discount Rates leads the commercial banks to resort to more loans from the Central Bank originating the Monetary Base increase and, consequently a currency offer increase; this currency offer increase will then lead to the reductions of the markets’ interest rates.

 

 

Translated from Portuguese by Susana Saraiva, Portuguese-English and English-Portuguese translation specialist. Contact: spams@sapo.pt.