Bank rate, also referred to as the discount rate in American English, is the rate of interest which a central bank charges on the loans and advances to a commercial bank. 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 mechanism 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 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.
In contrast the reverse repo rate is the rate at which banks can park surplus funds with reserve bank. This is mostly done when there is surplus liquidity in the market as a high reverse repo rate will make it attractive to banks to park surplus funds with the central bank.
Determining the rate
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.
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) by the Bank of Canada, (making it the target overnight rate + 0.25%).
Eurozone
In the eurozone the bank rate managed by the European Central Bank 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 (ECBS) and earn interest using the Deposit facility.
India
Bank rate in India is determined by Reserve Bank of India (RBI). It is the rate at which RBI gives loan to commercial banks with collateral ( RBI act 1934 sec.49 ) The RBI also provides short term loans to its clients (keeping collateral) which is called the repo rate. RBI revises this rate periodically. However, there is no predetermined schedule. The repo rates are changed re-actively depending on the economy. Like other countries, repo rates affect the money flow into the nation's economy and affect the inflation and commercial banks' lending or interest rate The Indian bank rate is 6.75Â %, which is same as the rate for Marginal Standing Facility (MSF)
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.
Singapore
In Singapore, the Monetary Authority of Singapore strategically review its Monetary Policy to promote price stability as a sound basis for sustainable economic growth.
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, 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.
See also
- Official bank rate
- Official cash rate
- Overnight rate
- Federal funds rate
- Monetary policy
- Discount window