Concepts
The terms behind the news
Short, plain-language definitions, each with a real example. Every term links to the mechanics that use it and the stories it appears in.
- Basis point (bp)
- One hundredth of a percentage point, used for small moves in rates and yields. 25 bp = 0.25 percentage points.
- Bond yield
- The annual return a buyer earns by purchasing a bond at today’s price and holding it to maturity. When a bond’s price falls, its yield rises. The 10-year yield is the benchmark for mortgages and long-term business loans.
- Brent crude
- The main global benchmark price for oil, based on crude from the North Sea. It is quoted in US dollars per barrel. The US benchmark is called WTI (West Texas Intermediate).
- Budget deficit
- The amount by which a government’s spending exceeds its revenue in a year, usually shown as a share of GDP. The government covers the gap by borrowing, mostly by selling bonds.
- Central bank
- The public institution that sets a country’s short-term interest rates and oversees its money and banking system. In most advanced economies it is independent of the government.
- Core inflation
- Inflation without the most volatile prices, mainly energy and food. It shows the underlying trend that central banks watch most closely.
- Credit rating
- A grade from an agency such as S&P, Moody’s or Fitch on how likely a borrower is to repay. A downgrade can force some investors, whose rules limit how much lower-rated debt they hold, to sell.
- Debt-to-GDP ratio
- A government’s total debt divided by the economy’s annual output. It shows how heavy the debt is relative to the country’s ability to pay. The EU’s reference value is 60%.
- Exchange rate
- The price of one currency in terms of another. When a currency weakens, imports cost more and exports become cheaper for foreign buyers.
- Government bond
- A loan to a government. The buyer pays a price today, receives a fixed interest payment (the coupon) every year, and gets the face value back when the bond matures.
- Imported inflation
- Inflation that comes from abroad: higher prices for imported goods and energy, or a weaker currency that makes every import more expensive.
- Inflation
- How fast average consumer prices are rising, measured as the change in the consumer price index (CPI) compared with the same month a year earlier.
- Inflation target
- The inflation rate a central bank aims for over time. The Fed, ECB, Bank of England and Bank of Japan all target 2%.
- Policy rate
- The short-term interest rate a central bank sets. It anchors what banks pay to borrow from each other overnight, and from there flows into loan and savings rates. Its name differs by country.
- Real interest rate
- An interest rate minus inflation. It shows what borrowing really costs once rising prices are taken into account.
- Safe haven
- An asset investors buy when they are worried, because they expect it to hold its value: usually US Treasuries, German Bunds, gold, the US dollar, the Swiss franc and sometimes the yen. Heavy buying pushes bond prices up and yields down.
- Sovereign spread
- The difference between the yield on one government’s bonds and a benchmark government’s bonds of the same maturity, usually quoted in basis points. In the euro area the benchmark is Germany.
- Supply shock
- A sudden change in the supply of something important, such as oil, that moves prices without any change in demand. A negative supply shock raises prices and slows growth at the same time, which leaves central banks with a dilemma.
- Term premium
- The extra yield investors demand for locking their money up for many years, on top of what they expect short-term rates to average. It compensates for uncertainty about inflation and government finances.
- Trade balance
- Exports minus imports over a period. A deficit means a country buys more from abroad than it sells, so it needs foreign currency to pay the difference.