What Is a Rediscount?

Rediscount is a term that is used in connection to the dynamics of a certain type of transaction that occurs between the main bank in a country and other qualified auxiliary banks. Usually, when banks seek to obtain loans from the central bank, they may do so with some level of discount, which will be determined at the discretion of the central bank with the intention of using such a tool to influence the economy. The rediscount rate refers to another lowering of the interest rate that is charged by such a bank to the auxiliary banks, a factor that makes the aggregate interest rate become lower than it was before the rediscount was applied to the interest on the loan.

The connection between this application of the rediscount and the intention of the central bank is the fact that it is usually borne out of a desire by such a bank to influence the economy. Since central banks have the mandate to manipulate the economy through the application of certain policies and tactics, they generally use the rediscount process as one of the means to attain such stabilizing factors. The process for the decision of the application of the policies is based on the result of the analysis of the economy under consideration. As such, if the analysis of the economy leads to the determination of a general slowing down of the same, the central bank will introduce monetary policies meant to increase the expenditure and general consumption as a means of reviving up the economy.

An example of such a tactic will be the lowering of the interest rate at which the commercial banks in the economy can obtain loans from the bank through the use of rediscount. In a sense, the application of the rediscount is meant to serve as a sort of event that precipitates the transmission of the intention of the central bank to the wider economy. In this sense, the banks may be said to be a sort of conduit pipe for the transference of the monetary policy initiated by the central bank. To this end, the banks will consequently reduce the interest they charge their customers for the granting of credit and the issuance of loans. This affects the consumers by emboldening them to spend more as a result of the easier access to funds to service their consumption.