A unit of measurement equal to one hundredth of a percentage point (0.01%). Used to express changes in interest rates, bond yields, and other financial percentages with precision.
What Is a Basis Point?
A basis point (bp or bps) equals 0.01%, or one hundredth of one percent. When the Federal Reserve raises the federal funds rate from 5.25% to 5.50%, that is a 25 basis point increase. The term eliminates ambiguity: saying rates rose "by 0.25%" could be confused with a relative increase (0.25% of 5.25%), while "25 basis points" is unambiguous.
Basis Points in Forex Trading
Central bank rate decisions are almost always discussed in basis point terms. Standard moves are 25 bps, with 50 bps considered aggressive and 75 bps or more reserved for emergency tightening or easing. Markets closely track the probability of different basis point moves using tools like the CME FedWatch tool, which derives probabilities from interest rate futures.
Practical Examples
If traders expect a 25 bp hike but the Bank of England delivers 50 bps, the surprise 25 bp difference can move GBP/USD 100+ pips. Conversely, a widely expected 25 bp cut may produce minimal movement because it is already "priced in." Bond yield spreads between countries, quoted in basis points, are a key input for forex Fundamental Analysis. A widening of the US-Germany 10-year yield spread by 15 bps, for instance, tends to strengthen USD against EUR.
Related Terms
Interest Rate
The cost of borrowing money, set by central banks as a primary monetary policy tool. Interest rate differentials between countries are the dominant driver of forex exchange rates.
Base Rate
The benchmark interest rate set by a central bank, from which all other lending and deposit rates in the economy are derived. Also called the policy rate, key rate, or bank rate.
Pip
The smallest standard unit of price movement in a currency pair. For most pairs, one pip equals 0.0001. For JPY pairs, one pip equals 0.01.
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