Basis point

A basis point, often shortened to "bp" or "bips" in speech, is 0.01%, so 100 basis points equal one percentage point. The unit exists to avoid ambiguity. If a rate of 2% "rises by 10%", it is unclear whether it is now 2.2% or 12%. Saying it rose by 20 basis points is unambiguous: it is now 2.20%.

Where you will meet it

• Central bank decisions: "the ECB cut its deposit rate by 25 basis points" means a cut of 0.25 percentage points.
• Bond yields: "the 10-year yield rose 8 bp" means, say, from 4.10% to 4.18%.
• Rate differentials: the gap between two countries' rates, which drives swap charges and the carry trade, is often quoted in basis points.
• Fees: some fund and account charges are quoted in basis points per year.

Worked example

A central bank holds its policy rate at 3.75% and markets expected no change. Instead it cuts by 50 basis points to 3.25%. That is half a percentage point, twice the usual 25 bp step, and the surprise element is what tends to move the currency. See central banks and interest rates.

Not a pip

Basis points and pips are both small units, but they measure different things. A basis point is a percentage of something (a rate or yield). A pip is a fixed price increment in a currency pair, usually 0.0001. A move of one pip in EUR/USD at 1.1000 is not one basis point of the price.