Bank rate

For the US financial company, see Bankrate. For interest rates paid by or to consumers or businesses, see interest rate.

Bank rate, also referred to as the discount rate in American English,[1] is the rate of interest which a central bank charges on the loans and advances to a commercial bank.

Whenever a bank has a shortage of funds, they can typically borrow from the central bank based on the monetary policy of the country.

The borrowing is commonly done via repos, where the repo rate is the rate at which the central bank lends short-term money to the banks against securities. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from the central bank becomes more expensive. It is more applicable when there is a liquidity crunch in the market.

The reverse repo rate is the rate at which banks can park surplus funds with reserve bank, while the repo rate is the rate at which the banks borrow from the central bank. It is mostly done when there is surplus liquidity in the market.

How the rate is determined and its impact on the economy

The interest rate that is charged by a country’s central or federal bank on loans and advances controls money supply in the economy and the banking sector. This is typically done on a quarterly basis to control inflation and to stabilize the country’s exchange rates. A fluctuation in bank rates triggers a ripple-effect as it impacts every sphere of a country’s economy. For instance, the prices in stock markets tend to react to interest rate changes. A change in bank rates affects customers as it influences prime interest rates for personal loan

By country

Australia

In Australia, the Governor of the Reserve Bank of Australia (RBA) sets the bank rate, known as the official cash rate, which is reviewed by the Reserve Bank Board each month.

Brazil

In Brazil, the discount rate is called SELIC (Special System of Liquidation and Custody, translated). It is the mean term of the overnight rate, fixed by the Committee of Monetary Politics, a branch of the Central Bank of Brazil. There are some assets of the public debt that are harnessed to the SELIC: an increase in this rate provides more profit for its owner.[2]

Canada

In Canada, the bank rate is defined as the upper limit of the overnight rate band, announced reviewed and modified if necessary eight times each year (a schedule implemented in November 2000)[3] by the Bank of Canada, (making it the target overnight rate + 0.25%).[4]

India

It is the rate at which a central bank is ready to buy or rediscount bills of exchange or other commercial papers. It also signals the medium-term stance of monetary policy. When bank rate is raised, it is expected that all interest rates will move together in the same direction. [5]

New Zealand

The governor of the Reserve Bank of New Zealand sets the New Zealand bank rate known as the Official cash rate, which is reviewed by the Reserve Bank board approximately every six weeks.

United Kingdom

In the UK, bank rates are set by the Bank of England's Monetary Policy Committee. The key interest rate is called the official bank rate,[6] which is the lowest rate at which the Bank acts as lender of last resort to the money markets.

United States

In the United States, the bank rate is the discount rate, which is set by the Federal Reserve.[1]

See also

References

  1. ↑ 1.0 1.1 Boyes, William; Melvin, Michael. Fundamentals of Economics (6th ed.). p. 329.
  2. ↑ In English, the Central Bank of Brazil information.
  3. ↑ "The Target for the Overnight Rate". bankofcanada.ca. Bank of Canada. Retrieved 10 February 2015.
  4. ↑ Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill. pp. 50–51. ISBN 0-07-087158-2.
  5. ↑ "RBI repo rate - Indian central bank’s interest rate". global-rates.com. HomeFinance. Retrieved 10 April 2015.
  6. ↑ "CHANGES IN BANK RATE, MINIMUM LENDING RATE, MINIMUM BAND 1 DEALING RATE, REPO RATE AND OFFICIAL BANK RATE" (PDF).
Wikisource has the text of the 1911 Encyclopædia Britannica article Bank Rate.