Key Terms
Basis point
A small fixed fraction of a percentage point used as the standard unit for quoting changes in interest rates without the ambiguity of percentages of percentages.
By the Investfora Research Desk
A basis point is one hundredth of a percentage point. Rates and yields are themselves quoted in percentages, so describing a change in percentage terms invites confusion: a 'one per cent rise' in a rate could mean adding one percentage point, or increasing the rate by one per cent of itself. Basis points remove the ambiguity by naming an absolute unit. One hundred basis points make one percentage point, so a change of 0.25 percentage points is 25 basis points.
A worked example
Suppose a hypothetical policy rate stands at 3.00 per cent and is raised by 25 basis points: the new rate is 3.25 per cent. A later cut of 50 basis points would take it from 3.25 per cent to 2.75 per cent. By contrast, raising 3.00 per cent by one per cent of itself gives 3.00 multiplied by 1.01, which is 3.03 per cent — a far smaller move, and precisely the confusion the unit exists to avoid.
A basis point measures the size of a move, not its weight. The same 25 basis points can matter very differently depending on the instrument, its maturity and the level rates start from; the unit carries none of that context.