What is a basis point?

A basis point is one hundredth of a percentage point. It takes 100 basis points to make 1 percentage point, so a rate that moves 25 basis points has moved 0.25 percentage points. Written “bps” and pronounced “bips”, the unit exists to describe small rate changes without ambiguity: a 25 bps rise is unmistakably smaller than a 50 bps rise, whereas “a quarter of a percent” can be misheard as a quarter of the rate itself rather than a quarter of a percentage point.

Why finance talks this way

Interest rates rarely move in whole percentage points. Central banks typically adjust policy rates in small steps, and bond yields drift by fractions of a point most days. Describing those moves as “points” would be too coarse to be useful, and “a percent of a percent” invites confusion about what’s being multiplied by what. Basis points sidestep both problems: every basis point is a fixed, unambiguous slice of a percentage point, so a rate change can be stated as a whole number with no fractions and no room for misreading.

Reading it in the wild

Central-bank rate decisions and bond-yield movements are almost always reported in basis points. A headline saying a bank raised rates “by 25 basis points” means the rate rose 0.25 percentage points; “50 bps” means 0.5 percentage points. Divide by 100 whenever you see “bps” and you have the percentage point figure straight away. The same unit turns up wherever a percentage point, such as the gap between a quoted rate and the AER, needs to be described precisely rather than approximately.