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 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 of the country.
The borrowing is commonly done via repos: 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. This is mostly done when there is surplus liquidity in the market.
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.
In Australia, the Reserve Bank of Australia sets the bank rate, known as the official cash rate, which is reviewed by the Reserve Bank Board each month.
In Brazil, the discount rate is called SELIC (Special System of Liquidation and Custody, translated). It is the mean term[clarification needed] 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 whose interest rate is linked to the SELIC: an increase in this rate provides more profit for its owner.
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%).
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.”
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 and earn interest using the “Deposit facility”.
In India, the Reserve Bank of India determine the bank rate, which is the standard rate at which it is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under this Act. (R 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. The Indian bank rate is 6 %
5%[when?], which is same as the rate for Marginal Standing Facility.
In New Zealand, 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.
In Singapore, the Monetary Authority of Singapore strategically reviews its Monetary Policy to promote price stability as a sound basis for sustainable economic growth.
In the United Kingdom, 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.
In the United States, the bank rate is the discount rate, which is set by the Federal Reserve.
- ^ Jump up to:ab Boyes, William; Melvin, Michael. Fundamentals of Economics (6th ed.). p. 329.
- ^In English, the Central Bank of Brazil information.
- ^“The Target for the Overnight Rate”. bankofcanada.ca. Bank of Canada. Retrieved 10 February 2015.
- ^Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill. pp. 50–51. ISBN 0-07-087158-2.
- ^Argitis, Theophilos (July 12, 2017). “Bank of Canada Raises Rates for First Time in 7 Years”. Bloomberg News.
- ^Hopkins, Andrea; Schnurr, Leah. “Bank of Canada raises rates, analysts see more hikes in store”. Reuters.
- ^“Marginal Cost of Funds based Lending Rate (MCLR)”. LoansXpert. Retrieved 2019-09-03.
- ^“Singapore’s Exchange Rate-Based Monetary Policy” (PDF). Monetary Authority of Singapore.
- ^“Changes in Bank Rate, Minimum Lending Rate, Minimum Band 1 Dealing Rate, Repo Rate and Official Bank Rate” (PDF).