Base Rate

The base rate, or policy rate, is the headline interest rate set by a central bank, and it is the starting point for deposit and lending rates across the economy. Korea's is set by the Bank of Korea's monetary policy board and the United States' by the Federal Reserve at scheduled meetings.

A central bank steers the economy with this single number because interest is the price of money. When inflation runs too hot, raising the rate makes borrowing expensive, which slows lending, cools spending and investment, and eases price pressure. When the economy stalls, cutting the rate puts money back in motion.

It reaches daily life with a lag. A higher policy rate raises banks' funding costs, lending rates follow, and households on floating-rate loans see payments rise months later. Deposit rates rise too, though lending rates usually move faster. In asset markets, safer deposits paying more makes stocks and property relatively less attractive.

This is why markets react less to the current rate than to where it is heading. A hike everyone expected is already in prices, so shares and currencies often move on the tone of the central bank's statement or its rate projections rather than the decision itself. Changes typically come in 25 basis point steps.