A central bank changes a single rate and borrowing costs shift across an entire economy. The connection is indirect, and the path explains why some loans reprice within weeks and others take years.
The policy rate is a bank-to-bank rate
The rate a central bank sets applies to very short-term lending between banks and to the money banks park with the central bank overnight.
No household loan is priced directly off it. What changes is the cost of the cheapest money available to a bank, which then filters outward.
Because the rate governs the shortest maturities, its influence weakens as the term of a loan lengthens. Long-dated borrowing is priced more by expectations than by today's setting.
Deposit costs move next
Banks fund lending from deposits and from wholesale markets. When the central bank rate rises, wholesale funding becomes more expensive almost immediately.
Deposit rates follow more slowly, because a bank with plenty of stable retail deposits has little competitive pressure to raise them quickly.
That asymmetry is why lending rates often rise before savings rates do, and why the gap between the two widens during a tightening cycle.
Benchmark-linked loans reprice mechanically
Many floating-rate loans are contractually tied to an external benchmark, with a fixed margin added on top. The benchmark tracks money market conditions closely.
When the benchmark resets, the loan rate changes without any decision by the lender. Reset dates are written into the contract, commonly quarterly.
The borrower therefore experiences the change as a scheduled step rather than a gradual drift, and the timing depends on where they sit in the reset cycle.
Fixed-rate loans absorb the change differently
A fixed-rate borrower feels nothing until the fixed period ends. The lender has already hedged that exposure in wholesale markets.
What changes for them is the rate available at renewal, and the size of that step depends on how far rates moved during the fixed term.
Across a whole economy this staggers the effect, since only the fraction of borrowers reaching renewal in any given year experiences the new level.
Why transmission is uneven
The share of floating-rate borrowing differs sharply between countries, and it is a major reason the same policy move produces different results in different places.
Where most mortgages float, a rate change reaches household budgets within months. Where long fixed terms dominate, the effect arrives over years.
Central banks watch this composition closely, because it determines how much tightening is needed before spending actually responds.