Bank rate

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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[edit]

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 loans. It is the rate at which central bank provides to the commercial bank for the excess reserves being kept with the central bank.

By country[edit]

Australia[edit]

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[edit]

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[edit]

In Canada, the bank rate is defined as the upper limit of the overnight rate band announced each month by the Bank of Canada, (making it the target overnight rate + 0.25%).[3]

India[edit]

In India, the bank rate is the rate at which the Reserve Bank of India lends to commercial banks and other financial institutions for meeting shortfalls in their reserve requirements, for long-term purposes. The current Bank rate is overnight rate + 200 basis points.

New Zealand[edit]

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[edit]

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,[4] which is the lowest rate at which the Bank acts as lender of last resort to the money markets.

United States[edit]

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

See also[edit]

References[edit]

  1. ^ a b Boyes, William; Melvin, Michael. Fundamentals of Economics (6th ed.). p. 329. 
  2. ^ In English, the Central Bank of Brazil information.
  3. ^ Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill. pp. 50–51. ISBN 0-07-087158-2. 
  4. ^ "CHANGES IN BANK RATE, MINIMUM LENDING RATE, MINIMUM BAND 1 DEALING RATE, REPO RATE AND OFFICIAL BANK RATE".