overnight rate
The interest rate at which banks lend to each other for very short periods — typically overnight — to meet reserve requirements or manage liquidity.
Example
“The Bank of Canada's overnight rate of 5% transmitted to the broader economy through lending rates at commercial banks.”
Memory Tip
OVERNIGHT RATE = banks lending to each other for one night. Central banks target this to set monetary policy.
Why It Matters
The overnight rate influences the broader interest rates that affect your savings account returns, mortgage payments, and credit card charges. When central banks adjust the overnight rate, banks pass these changes through to consumers within weeks or months, making it a key driver of your personal borrowing and saving costs.
Common Misconception
Many people believe the overnight rate directly determines what they pay on their mortgage or credit card, but it actually sets a floor for interbank lending that eventually influences consumer rates indirectly. Your personal rates depend on many factors including your credit score, the type of loan, and market conditions, so changes to the overnight rate do not immediately affect your individual accounts.
In Practice
If the Federal Reserve sets a target overnight rate of 5.25 to 5.50 percent, banks will lend reserve balances to each other at rates within this range each night. When one bank needs to hold more reserves to meet regulatory requirements, it borrows from another bank that has excess reserves, and they agree on an interest rate within that target range for the one-night loan before the reserves are returned the next morning.
Etymology
OVERNIGHT (for one night, very short term) RATE. The interest RATE for OVERNIGHT lending between banks.
Common Misspellings
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