The bank rate is the minimum rate at which the Central Bank of a country is prepared to give credit to the commercial banks. The increase in bank rate increases the rate of interest and credit becomes dear. Accordingly, the demand for credit is reduced.
On the other hand, decrease in bank rate lowers the market rate of interest and credit becomes cheap. Accordingly, demand for credit expands. The Central Bank adopts dear money policy when supply of credit needs to be reduced during periods of inflation. It adopts cheap money policy when credit needs to be expanded during deflation.