# What does Base Rate Mean?

The base rate, otherwise known as the bank rate or base interest rate, refers to the set interest rate, as determined by the central bank or reserve within a local economy, to be applied to loans for any commercial banks.

The base rate, otherwise known as the bank rate or base interest rate, refers to the set interest rate, as determined by the central bank or reserve within a local economy, to be applied to loans for any commercial banks. Whilst these commercial banks may decide on the interest rates for providing loans, these interest rates are usually built on the base rate.

Commercial banks adjust their interest rates in line with changes in the base rate from the central bank, and this impacts the interest rates offered to consumers. For example, if the central bank increases the base rate, commercial banks would follow suit by raising interest rates, thereby increasing the cost of borrowing. If the central bank decreases the base rates, commercial banks would similarly lower their interest rates, decreasing the cost of borrowing and motivating consumer spending. This provides the central bank with the ability to influence consumer spending in either direction, as necessitated by the state of the economy.

Read also: What is Commercial Real Estate?

## How to calculate the base rate?

The base rate is calculated by the central bank of a country, taking into account the cost of deposits, operating costs and the profitability of the bank in the previous financial year. Whilst the calculation of base rate may differ across countries, the cost of deposits generally has the largest impact on the base rate calculation.

## What is Singapore’s base rate today?

The base rate in Singapore is determined by the Singapore Overnight Rate Average (SORA), controlled by the Monetary Authority of Singapore (MAS). The SORA is calculated based on the average rate of all interbank lending transactions in Singapore, and applies for loans such as home loans or mortgages. The SORA takes a shift from the SIBOR and SOR, providing more economic control to the MAS rather than to the banks.

The most recent SORA is 1.7934%, as of 22 July 2022.

## What is the base rate in a loan?

A commercial bank providing a loan will refer to the set base rate to decide on the interest rate to be applied to a loan. A low base rate would result in a low interest rate being applied to a loan and vice versa. With a reduction in the interest accrued on the loan, more consumers are encouraged to take out more loans, including personal loans, car loans or housing loans. This motivates spending, which helps stimulate the economy.

## How does the base rate affect your mortgage?

If the base rate is reduced by the central bank, commercial banks are likely to decrease their interest rates for mortgages as well. Lenders can then take out mortgages at reduced rates, increasing their ability to purchase homes. On the other hand, if the central bank increases the base rate, the interest rates for mortgages from commercial banks would also increase, making it less affordable for consumers to take out mortgages.

This increased base rate also leads to an increase in interest rates for savings accounts, which encourages saving, whilst a decreased base rate leads to a decrease in interest rates for savings accounts, which encourages spending.