Lecture series
Central banks and policy rates: how rates reach borrowers
What central banks do, how they set a policy rate and make it hold in the market, how a change in that rate travels to the loan rates that households and firms pay and the deposit rates they receive, and how to read a rate decision. Examples come from Southeast Asia, set against the United States and the euro area. Six lessons.
6 of 6 lessons published. Lesson 1 is free to read.
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- 01What a central bank does, and what a policy rate isA central bank issues the currency, keeps payments between banks running and, in Malaysia, Thailand, the Philippines, the United States and the euro area, among others, steers interest rates through a policy rate. The policy rate is the rate it sets to signal its stance, and changes in it are meant to move the rates that borrowers pay. Singapore shows that a central bank can steer through the exchange rate instead.
- 02Mandates, independence and inflation targetsThe law tells a central bank what to aim for, independence gives it room to pursue that aim, and several of the central banks in this lesson work to a numerical inflation target that the public can check them against. This lesson compares the mandates of the US Federal Reserve, the European Central Bank, Bank Negara Malaysia and Bank Indonesia, explains why independence matters, and shows how Thailand, Indonesia and the Philippines set their inflation targets.
- 03Implementing the rate: open market operations, corridors and reservesAnnouncing a policy rate does not by itself change what banks charge each other. Central banks make the rate hold by managing the reserves that banks keep with them, by dealing in the market, and by offering standing facilities that put a ceiling and a floor under overnight rates. This lesson explains the corridors used in Thailand, Malaysia and the Philippines, and how the United States and the euro area steer through the rate they pay on deposits.
- 04Transmission: how a rate change reaches the economyA change in the policy rate first moves market rates, asset prices and the exchange rate, and only later spending, jobs and prices. This lesson sets out the main channels, how long each stage takes in one well-studied economy, the United Kingdom, how quickly market rates follow in the Philippines, and why the mix of fixed and floating debt changes the route.
- 05From policy rate to loan rate: pass-through, spreads and lagsLoan rates rarely move one for one with the policy rate. This lesson explains how a loan rate is built from a reference rate and a spread, how to measure pass-through, why it is weaker for households and small firms, why deposit rates and funding structure matter, and what the Philippines' tightening of 2022 to 2023 shows, set against estimates for 18 economies.
- 06Reading a rate decision: statements, forward guidance and what lenders watchA rate decision is more than a number. This lesson explains what central banks publish around a decision, how a statement is built, what forward guidance is and how it has been used, how projections such as the US dot plot are read, and how a lender can turn a decision into a change in its own interest income, with examples from Malaysia, Thailand, the United States and the euro area.
Quiz and certificate 10 questions; those on lesson 1 are free to try. Read every published lesson and score 80% or more for a certificate of completion.
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