Overnight rate

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The overnight rate is generally the rate that large banks use to borrow and lend from one another on the interbank market. In some countries (for example, Canada), the overnight rate may be the rate targeted by the central bank to influence monetary policy. In most countries, the central bank is also a participant on the overnight lending market, and will lend or borrow money to some group of banks.

There may be a published overnight rate that represents an average of the rates at which banks lend to each other; certain types of overnight operations may be limited to qualified banks. The precise name of the overnight rate will vary from country to country.

[edit] Background

Throughout the course of a day, banks will transfer money to each other, to foreign banks, to large clients, and other counterparties on behalf of clients or on its own account. At the end of each working day, a bank may have a surplus or shortage of funds. Banks that have surplus funds may lend them to or deposit them with other banks, who borrow from them. The overnight rate is the amount paid to the bank lending the funds.

Banks will also choose to borrow or lend for longer periods of time, depending on their projected needs and opportunities to use money elsewhere.