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Target Interest Rate

The target interest rate is the rate at which banks lend to each other for a period of one day (i.e. extremely short-term, low-risk lending). It acts as the interest rate upon which all other interest rates are (formally or informally) based. Simply put, when the target rate goes up, it pushes up the interest rates that borrowers have to pay in the rest of the economy. The target interest rate is set by the central bank in a currency area – the Federal Reserve sets it in the US, the European Central Bank sets it in Europe, and so on…

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