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discount rate, interest rate charged by a central bank for loans of reserve funds to commercial banks and other financial intermediaries. This charge originally was an actual discount (an interest charge held out from the amount loaned), but the rate is now a true interest charge, even though the term discount rate is still used.
Inflation drives up the cost of everyday goods, affecting what you pay for items both large and small.
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The discount rate serves as an important indicator of the condition of credit in an economy. Because raising or lowering the discount rate alters the banksâ borrowing costs and hence the rates that they charge on loans, adjustment of the discount rate is considered a tool to combat recession or inflation. The discount rate also is used to deal with balance-of-payments deficitsâthat is, to regulate international movements of capital.
