Rate Cut

Definition

A central bank’s decision to lower its policy rate. Lower policy rates can make some loans cheaper over time.

Central banks may cut rates when inflation has eased or economic activity has weakened. A cut lowers the starting point for some borrowing rates, which can encourage households and businesses to spend or invest. Fixed-rate loans already in place generally keep their agreed rate.

Example

A central bank lowers its policy rate from 5.00% to 4.75%. That is a 25-basis-point rate cut.