In turn, the central bank’s changes in its policy rate are expected to impact the banks’ cost of funds, both the rates they would pay to depositors and the rates they would demand for making loans.
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).