what will be impact of base interest rate in banking enviornment ?
The fluctuations of the base interest rate have an important impact on the banking environment, and consequently, throughout the economy. As I am most comfortable with the US, I will use American banking examples. However, similar mechanisms are applicable throughout other market economies with a central bank. In the US, the Federal Reserve uses a variety of levers to influence the federal funds rate (which is the interest rate charged by banks to other banks for overnight loans). The most popular mechanism for influencing the federal funds rate is via open market initiatives, such as buying and selling US Treasuries (i.e., if the Federal Reserve wishes to push the interest rate up, its open market operations will sell US Treasuries, which would lead to banks and investors buying the Fed’s US Treasuries and subsequently reducing the money supply). Generally, there is a premium over the federal funds rate that generates a prime rate – which is prime lending rate for banks. That prime le
