The central bank – the Federal Reserve in the US and the European Central Bank in Europe – sets a target base interest rate. Technically, it’s the rate at which banks lend to each other for a period of 1 -day (e.g. extremely low risk lending). As such, it acts as the base interest rate on which all other interest rates are either formally or informally based on. 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.