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 Brazil, the discount rate is called SELIC. 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 whose interest rate is linked 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 by the Bank of Canada,. Since September 2010, the Bank of Canada's key interest 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."
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 and earn interest using the "Deposit facility".
India
In India, the Reserve Bank of India determines the bank rate, which is the standard rate at which it is prepared to buy or re-discount bills of exchange or other commercial bills eligible for purchase under the RBI Act 1934. The Reserve Bank of India also provides short term loans to its clients 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. As of May 2020, the Bank Rate is 4.25%, the Repo Rate is 4.00% and Reverse Repo Rate is 3.75%.
New Zealand
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 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. The current interest rate is targeted in a range between 1%-1.25%.
