How do changes in bank rate affect money creation by Commercial Banks?

1.	How do changes in bank rate affect money creation by Commercial Banks? Explain.
Answer» Bank rate is the rate at which central bank offers loans to the Commercial Banks as a lender of last resort. During inflation, when supply of credit is to be reduced, bank rate is increased. This reduces borrowing by the Commercial Banks implying a reduction in their cash reserve and therefore, a reduction in their capacity to create credit. Following increase in bank rate, market rate of interest is also raised, implying a check on borrowings from the Commercial Banks. Thus, overall supply of credit is reduced in the economy. Exactly opposite is done to combat deflation: bank rate is lowered to increase the supply of credit.

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