Target Rate

Central banks aim for goals such as stable prices and healthy employment. Their most important tool is the interest rate at which banks lend to each other overnight.

By announcing a target for that rate, the central bank tells markets where it wants borrowing costs to be. The bank then uses tools to keep the actual rate near the target.

These include paying interest on the money banks hold at the central bank, lending at a set rate, and buying or selling securities. In practice the market rate usually sits close to the target, with small differences from day to day.

When the target rises, borrowing becomes more expensive for banks, and they pass the higher cost to customers through business loans, credit cards and mortgages. This tends to slow spending and cool inflation.

When the target falls, the effect runs in the opposite direction and encourages borrowing and investment. Many loans and deals are priced directly off the target rate or a market rate closely linked to it.

A variable-rate loan may be set at the target plus a margin, so any change in the target alters the borrower's interest bill. Finance teams therefore watch the announcements closely and build the possible changes into their budgets.

The term is also used in other settings, such as a target rate of return that a company or investor aims to earn on a project. In that sense, the target rate is an internal hurdle chosen by management.

The meaning depends on whether the context is monetary policy or business planning. Central banks usually explain their decisions in statements and press conferences, and markets try to predict the next move in advance.

A change that matches expectations may have little effect on prices, while a surprise can move currencies, bonds and shares sharply. Finance teams therefore plan for several scenarios instead of relying on one forecast.