Central Bank Interest Rates

The role of a Central Bank is to control the supply of money within a monetary union e.g. the European Central Bank for Euro countries.

Central Banks want to keep growth at c. 2% steadily each year

The Central Bank want to avoid 2 things in particular:

• Too much Inflation

• Deflation

Retail Banks essentially take money from a Central Bank and lend it to borrowers. The difference in rates is their profit margin.

The interest rates a bank charges (on loans) and pays out (on deposits) should, all else being equal, be relatively consistent with the base Central Bank rate. Over the years, Traditional Banks have diversified into other areas to become complex entities.