The discount rate is the most important indicator,which forms the main aspects of the activity of credit institutions. So, it is an interest rate, set by the national bank of the country for other commercial banks. Its size depends on the monetary policy pursued by the state, and the goals it pursues.
For example, with high inflation ratesthe discount rate rises. The consequence of this is a rise in price of loans issued by the national bank. Accordingly, the borrowed funds of commercial banks become much more expensive, the demand for the provision of credit services is reduced. In such a simple way, the government helps to reduce the amount of money supply, and then withdraw some of the cash from circulation. This helps to stop inflation growth and keep it at a certain border.
The discount rate is a tool of the centralbank, through which it regulates the main processes of the economy, for example, supports the exchange rate of the national currency at the required level, controls the amount of money in circulation, forms the gold and currency reserve of the country. In practice, a sharp increase or decrease in the interest rate is rarely observed, as a rule, minor but no less effective adjustments are allowed.
When the discount rate increases, the ratethe national currency is stabilizing. In addition, commercial banks lack credit resources, because central bank loans are becoming an expensive pleasure. It is at this time that the discount rate of bank interest on deposit operations increases. In the proposed conditions, the population is more profitable to transfer the existing capital to a deposit account than to invest in production or financial activities. Thus, there is a withdrawal of funds from circulation for a certain period, and hence, a reduction in the level of inflation. This method is used in a policy called "expensive" money.
And the policy of "cheap" money assumes the existence ofreduced refinancing rate. It is introduced when there is a decline in production activity in the country. The government understands the need to maintain a certain industry and creates such conditions for credit institutions that allow reducing interest rates on loans and borrowings, especially for legal entities. This is how capital flows into industry or into specific services, and the development of industry is stimulated.
It is worth noting that the above measuresThey are considered effective, but only in a certain period of time. Further increase or decrease in the rate leads to negative consequences. Unfortunately, each event has some drawbacks. Regulation of the refinancing rate also has a "reverse side of the coin", which is as follows:
It can be concluded that the discount rate is a good tool that serves to achieve the basic objectives of the monetary and credit policy of the state, but it should be managed competently.