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The Base Rate as a Primary Tool of Monetary Policy

The base rate is the rate of interest the banks use as the basis for calculating their own rates, which they use to charge on loans they give. It is defined by the Central Bank, which may be or may not be under the control of the state – it depends on the country. To put in a word, it is the rate charged by the Central Bank, when it sells money to all the other lending agencies. It is quite natural that it serves as the reference point for any financial activity that goes on in the country and, on a broader scale, a reference point for those, who decide whether the country is worthy of investing or not.

The one who controls the Central Bank controls the cash flow. The one who controls the cash flow controls economical life of the nation. When the Central Bank is independent from the state, the base rate follows the changes in economical situation in a natural way, rising and falling in accordance with rising and falling of the demand for credits. When it is controlled by the state, it may be used as a tool of controlling economical life quite arbitrary, destroying the ties between the reality and the changes of the base rate, thus disrupting the flow of information the changes of the base rate provide.

However, as the state always strives to control as much as possible, it is natural that the base rate is among the things it wishes to control. People disagree on the actual effects of this, but economically we may see only one thing: the intrusion in the information flow that the base rate represents.

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Checked: 21 Jan 2018
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