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Bank rate, also known as discount rate in American English, is the
rate of interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...
which a
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
charges on its loans and advances to a
commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with cor ...
. The bank rate is known by a number of different terms depending on the country, and has changed over time in some countries as the mechanisms used to manage the rate have changed. Whenever a bank has a shortage of funds, they can typically borrow from the central bank based on the
monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
of the country. The borrowing is commonly done via
repo A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two par ...
s: the repo rate is the rate at which the central bank lends short-term money to the banks against securities. It is more applicable when there is a liquidity crunch in the market. In contrast, the reverse repo rate is the rate at which banks can park surplus funds with the reserve bank, which is mostly done when there is surplus liquidity.


Determining the rate

The interest rate that is charged by a country's central or federal bank on loans and advances controls the 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 change in bank rates may trigger a ripple effect, as it impacts every sphere of a country's economy. For instance, stock markets prices tend to react to unexpected interest rate changes. A change in bank rates affects customers as it influences prime interest rates for personal loans.


By country


Australia

In Australia, the
Reserve Bank of Australia The Reserve Bank of Australia (RBA) is Australia's central bank and banknote issuing authority. It has had this role since 14 January 1960, when the ''Reserve Bank Act 1959'' removed the central banking functions from the Commonwealth Bank. T ...
sets the bank rate, known as the
official cash rate The official cash rate (OCR) is the term used in Australia and New Zealand for the bank rate and is the rate of interest which the homogeneous central bank charges on overnight loans between commercial banks. This allows the Reserve Bank of Austral ...
, 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 Policy'', a branch of the
Central Bank of Brazil The Central Bank of Brazil ( pt, Banco Central do Brasil) is Brazil's central bank. It was established on Thursday, 31 December 1964, a New Year's Eve. The bank is not linked to any ministry, currently being autonomous. Like other central banks, ...
. There are some assets of the public debt whose interest rate is linked to the SELIC: an increase in this rate provides more profit for its owner.


Canada

In Canada, the bank rate is defined as the upper limit of the
overnight rate The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market. In some countries (the United States, for example), the overnight rate may be the rate targeted by the central bank ...
band, announced, reviewed, and modified if necessary eight times each year (a schedule implemented in November 2000) by the
Bank of Canada The Bank of Canada (BoC; french: Banque du Canada) is a Crown corporation and Canada's central bank. Chartered in 1934 under the ''Bank of Canada Act'', it is responsible for formulating Canada's monetary policy,OECD. OECD Economic Surveys: Ca ...
, (making it the target overnight rate + 0.25%). Since September 2010, the Bank of Canada's key interest rate (overnight rate) was 0.5%. In mid 2017, inflation remained below the Bank's 2% target, mostly because of reductions in the cost of energy and automobiles; also, the economy was in a continuing growth spurt with a predicted GDP growth of 2.8% by year end. On 12 July 2017, the bank increased the key rate to 0.75%. In a statement, it confirmed that the rate would continue to be evaluated on the basis of inflation. "Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the bank's inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities."


Eurozone

In the
eurozone The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU policies ...
the bank rate managed by the
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#Intern ...
is called Standing Facilities, which are used to manage overnight liquidity. Qualifying counterparties can use the Standing Facilities to increase the amount of cash they have available for overnight settlements using the "Marginal Lending Facility". Conversely, excess funds can be deposited within the European Central Bank System and earn interest using the "Deposit facility".


India

In India, the
Reserve Bank of India The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible for ...
determines the bank rate, which is the standard rate at which it is prepared to buy or re-discount bills of exchange or other commercial bills eligible for purchase under the RBI Act 1934 (sec.49). The Reserve Bank of India also provides short term loans to its clients (keeping collateral) at what is called the repo rate. This rate is revised periodically. However, there is no predetermined schedule. The repo rates are changed reactively depending on the economy. As in other countries, repo rates affect the money flow into the nation's economy and affect the inflation and commercial banks' lending or interest rate. As of May 2020, the Bank Rate is 4.65%.


New Zealand

In New Zealand, the
Reserve Bank of New Zealand The Reserve Bank of New Zealand (RBNZ, mi, Te Pūtea Matua) is the central bank of New Zealand. It was established in 1934 and is constituted under the Reserve Bank of New Zealand Act 1989. The governor of the Reserve Bank is responsible for N ...
sets the New Zealand bank rate known as the
official cash rate The official cash rate (OCR) is the term used in Australia and New Zealand for the bank rate and is the rate of interest which the homogeneous central bank charges on overnight loans between commercial banks. This allows the Reserve Bank of Austral ...
, which is reviewed by the Reserve Bank Board approximately every six weeks.


Singapore

In Singapore, the
Monetary Authority of Singapore The Monetary Authority of Singapore (MAS) is the central bank and financial regulatory authority of Singapore. It administers the various statutes pertaining to money, banking, insurance, securities and the financial sector in general, as well ...
strategically reviews its Monetary Policy to promote price stability as a sound basis for sustainable economic growth.


South Africa

In South Africa the
South African Reserve Bank The South African Reserve Bank (SARB) is the central bank of South Africa. It was established in 1921 after Parliament passed an act, the "Currency and Bank Act of 10 August 1920", as a direct result of the abnormal monetary and financial condit ...
determines the repurchase rate (repo rate) for short-term loans it grants private banks through its Monetary Policy Committee.


United Kingdom

In the United Kingdom, bank rates are set by the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government of ...
's
Monetary Policy Committee Monetary Policy Committee (MPC) may refer to: * Monetary Policy Committee (India) of the Reserve Bank of India * Monetary Policy Committee (United Kingdom) The Monetary Policy Committee (MPC) is a committee of the Bank of England, which meets ...
. The key interest rate is called the
Bank Rate Bank rate, also known as discount rate in American English, is the rate of interest which a central bank charges on its loans and advances to a commercial bank. The bank rate is known by a number of different terms depending on the country, and ...
, and is the lowest rate at which the Bank acts as
lender of last resort A lender of last resort (LOLR) is the institution in a financial system that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank lending market when other facil ...
to the money markets.


United States

In the United States, the discount rate is a bank rate set by the
Federal Reserve Board of Governors The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the mon ...
for loans lent to commercial banks and other depository institutions through the Fed's
discount window The discount window is an instrument of monetary policy (usually controlled by central banks) that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by ...
. This is not to be confused with the
Fed Funds Rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances a ...
. The Fed issues three discount rates based on credit type: primary, secondary, and seasonal. Primary credit is the Fed's main discount program, and is available to institutions in sound condition for up to 90 days with no restrictions on its use. Secondary credit is available to institutions that do not qualify for primary credit, but it is limited to short loan periods (usually overnight), has some restrictions on its use, and is issued at a higher interest rate. Seasonal credit is available to institutions with deposits of less than $5,000,000 that demonstrate a need for inter-yearly fluctuations in liquidity - often caused by construction, college, farming, resort, municipal financing and other seasonal types of business. Current discount rates are published on the Fed's Discount Window webpage.


See also

*
Official bank rate In the United Kingdom, the official bank rate is the rate that the Bank of England charges banks and financial institutions for loans with a maturity of 1 day. It is the British Government's key interest rate for enacting monetary policy. It is ...
*
Official cash rate The official cash rate (OCR) is the term used in Australia and New Zealand for the bank rate and is the rate of interest which the homogeneous central bank charges on overnight loans between commercial banks. This allows the Reserve Bank of Austral ...
*
Overnight rate The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market. In some countries (the United States, for example), the overnight rate may be the rate targeted by the central bank ...
*
Federal funds rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances a ...
*
Monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
*
Discount window The discount window is an instrument of monetary policy (usually controlled by central banks) that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by ...


References

{{DEFAULTSORT:Bank Rate Interest rates Operations of central banks