Whenever a bank has a shortage of funds they can typically borrow it from the central bank based on the monetary policy of the country.
The borrowing is commonly done via Repos (Repurchase) 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 the 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 to control money supply in the economy and the banking sector. This is typically done on a quarterly basis to control inflation and 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.
In India, bank rate is the rate at which RBI lends to commercial banks and other financial institutions for meeting shortfalls in their reserve requirements, for long term purposes.
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.
In the United States the bank rate know as the Federal funds rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart.
|Wikisource has the text of the 1911 Encyclopædia Britannica article Bank Rate.|
- Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill. pp. 50–51. ISBN 0-07-087158-2.
- "CHANGES IN BANK RATE, MINIMUM LENDING RATE, MINIMUM BAND 1 DEALING RATE, REPO RATE AND OFFICIAL BANK RATE".