Basis Point

One hundredth of a percentage point. A small unit for a market where the differences are small and the amounts are large, and the difference between up a quarter and up 25 basis points is not small.

One hundredth of a percentage point

A basis point is one hundredth of a percentage point. One percentage point is therefore 100 basis points, and a quarter of a percentage point is 25 basis points. The unit exists because rate differences matter at a scale finer than whole percent, and saying zero point two five percent for every small move is clumsy and easy to mishear.

Why the unit exists

In markets where large sums are priced off small rate differences, a fraction of a percentage point is a substantial amount of money. A single basis point on a large balance is a real quantity, so the market needs a unit small enough to quote precisely. The basis point is that unit.

It is also a guard against ambiguity. A move in the policy rate quoted in basis points is a pure number of hundredths of a percent, with no dependence on how the surrounding sentence is phrased.

Saying it correctly

The common error is to mix the two scales. A move from 4% to 4.25% is an increase of 25 basis points, which is a quarter of a percentage point, not a quarter percent that some readers hear as a quarter of the rate's value. Keeping the two phrasings separate prevents a costly misreading.

One checkable use: whenever a move is quoted, convert it before you judge it. State it in basis points and confirm the arithmetic, since a change from 4.00% to 4.50% is 50 basis points, or half a percentage point. If a headline says up a quarter, ask whether it means a quarter point or 25 basis points; they are the same thing only when someone has checked.

Related: Yield Curve · Policy Rate · Duration

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