What is the terminal rate, and why is it important in monetary policy?

[Samuel]

Are you hearing the term terminal rate in discussions about central banks and interest rates and wondering what it means? Many people ask how the terminal rate is determined, how it affects borrowing, inflation, and markets, and why it plays a key role in shaping economic expectations.

 

[LiamOliver]

The highest rate of interest used by a central bank during a tightening cycle which affects inflation rates, the cost of borrowed money and the long term economy of the country.

 

[OlivaRock]

Basically, the terminal rate is the maximum interest rate that the central bank intends to achieve or wait before halting or reducing. This is important as it influences the price of a loan, reduction of inflation and future planning of individuals and markets.

 

[Darcey]

The terminal rate is the estimated peak interest rate a central bank aims for during a tightening cycle. It’s important in monetary policy because it signals the level needed to control inflation without harming economic growth, guiding markets, lenders, and investors on future borrowing costs and financial decisions.