For example, when a central bank reduces the policy repo rate with the intention to support aggregate demand in the economy, the expectation is that there would be a reduction in the banks’ cost of funds and lending rates, and in the spectrum of market interest rates (and vice versa when the policy rate is increased).
Lower lending interest rates of banks provide a boost to demand for bank credit from various segments of the society, for instance, from individuals and households for loans for consumer durables (such as automobiles) and for housing; and from entrepreneurs for new or increased investment in plant and machinery.