Trading term

What is Policy rate?

A policy rate is the interest rate a country's central bank sets, and it's the price every other rate in the economy is built on top of. In the United States it's the federal funds rate, which averaged 4.21% across 2025.

A committee at the central bank meets a handful of times a year and picks one number. That number is the policy rate. It's what banks charge each other to borrow overnight, and the central bank steers it up or down to hit a published inflation target.

Nothing else in the economy is set by that committee. Everything else is priced off it, plus or minus a margin for how likely the lender is to be paid back. In 2025, with the US base averaging 4.21%, an ordinary savings account paid 0.40% — 3.81 points below the base. A large company's bonds yielded 6.00%, a 30-year fixed mortgage cost 6.60%, and a credit card charged 21.22%. Same base rate, and a 20-point spread across the people using it.

It moves a long way over time. The highest annual average in the published US series since 1955 was 16.38% in 1981; the lowest was 0.08% in 2021. Every country has its own version under its own name. It's the federal funds rate in the US, Bank Rate in the UK, the deposit facility rate at the ECB, and the cash rate in Australia.

For example

In 2025 the US policy rate averaged 4.21%. A savings account paid 0.40%, which is 3.81 points below it. A credit card charged 21.22%, which is 17.01 points above it. One base rate, two very different prices.

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Why it matters to you

The policy rate is the one number that reprices almost everything at once — your mortgage quote, your savings rate, the cost of debt at every company you own. It never reaches you directly, though. It reaches you through the margin your bank adds on top. Knowing the base is what lets you see that margin, and the margin is the part you can actually shop around for.

⚠ The headline rate is not the rate you get

A cut gets announced and people expect their savings account to follow within the week. Banks tend to pass changes through quickly on what they charge you and slowly on what they pay you. In 2025 the US base averaged 4.21% while an ordinary savings account paid 0.40%. The gap is the business model, not a delay.

Frequently asked questions

What is a policy rate?

It's the interest rate a central bank sets to steer the economy, and the base that other rates are priced from. In the US it's the federal funds rate, the rate banks charge each other for overnight loans.

Who sets the policy rate?

A committee at the central bank, meeting on a published schedule. The Federal Reserve's is the FOMC, the ECB has its Governing Council, the Bank of England has the Monetary Policy Committee, and the Reserve Bank of Australia has its Board.

Why does the policy rate change?

Because the committee is aiming at an inflation target. The Fed, the ECB and the Bank of England all target 2%; the RBA targets a 2-3% band and aims at the midpoint. Inflation above target usually means raising the rate to cool spending, and inflation below it usually means cutting.

How high has the US policy rate been?

The highest annual average in the published series since 1955 is 16.38%, in 1981. The lowest is 0.08%, in 2021. Anyone who says rates are high or low is comparing against a window, so it's worth asking which one.

Read the full guide

How markets workWhat Is an Interest Rate? Who Sets It, and Why It Moves Your MoneyAn interest rate is the price of borrowing money for a year. Who sets it, why it moves, and why everything you own gets repriced when it does.12 min read

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