Discount Rate

The discount rate is the interest rate charged by a central bank to commercial banks for short-term loans. It is an essential tool in monetary policy, used by central banks to control the money supply and influence economic activity. A lower discount rate encourages borrowing and spending, stimulating economic growth, while a higher discount rate can slow inflation by making borrowing more expensive. In finance, the discount rate is also used in discounted cash flow (DCF) analysis to determine the present value of future cash flows, helping investors evaluate the attractiveness of an investment.

Example

If the central bank lowers the discount rate, commercial banks can borrow money more cheaply, which may lead to lower interest rates for consumers.