How does bank rate policy help in expanding or contracting credit in an economy?

● Bank rate is the rate at which the central bank provides loans to commercial banks.

● This is a helpful instrument to control the money supply.

● If the central bank increases the bank rate, the loans would become more costly for the commercial bank. They would then have to increase their rate of lending. The public would demand fewer loans leading to a fall in the credit demanded. This is called credit contraction in an economy.

● If the central bank decreases the bank rate, the loans would become cheaper for the commercial bank. They would then have to increase their rate of lending. The public would then have an increase in the demand for credit. This is called credit expansion in an economy.

● Thus, the bank rate policy help in expanding or contracting credit in an economy.