In financial markets, small changes in prices or rates can have a significant impact, which is why basis points are used to explain changes in percentages.

Central bank interest rate changes, for example, can have a significant impact on markets, even when the change is just a few basis points. If the Federal Reserve increases interest rates, what will happen? Currently, the rate is set at 1%, but it will rise by 30 basis points. As a result, the interest rate has risen from 1% to 1.3%.

The same is true for changes in the yield available from certain investments. If £10,000 is invested in an instrument with a yield, then each basis point move would be equal to £1 of profit returned.

A basis point (bp) is a unit of measure equal to 0.01% (1/100th of a percent), commonly used in finance to describe small changes in interest rates, bond yields, or other percentages. For example:

If the Federal Reserve raises interest rates from 5.25% to 5.50%, that’s an increase of 25 basis points.

A bond’s yield dropping from 3.75% to 3.70% represents a decline of 5 basis points.

In forex, if a currency pair’s spread tightens from 1.20% to 1.15%, the improvement is 5 bps.

Basis points eliminate ambiguity, saying "25 bps" is clearer than "0.25 percentage points." They’re crucial for precision in banking, investing, and trading, where tiny changes can significantly impact profits, loan costs, or economic policies.