Overnight Rate

Loading the player...

What is the 'Overnight Rate'

The interest rate at which a depository institution lends funds to another depository institution (short-term), or the interest rate the central bank charges a financial institution to borrow money overnight. The overnight rate is the lowest available interest rate, and as such, it is only available to the most creditworthy institutions.

BREAKING DOWN 'Overnight Rate'

Because the amount of money a bank has fluctuates daily based on its lending activities and its customers' withdrawal and deposit activity, the bank may experience a shortage or surplus of cash at the end of the business day. Those banks that experience a surplus often lend money overnight to banks that experience a shortage so the banking system remains stable and liquid.

The overnight rate provides for an efficient method for banks to access short-term financing from central bank depositories. As the overnight rate is influenced by the central bank of a nation, it can be used as a good predictor for the movement of short-term interest rates for consumers in the broader economy. The higher the overnight rate, the more expensive it is to borrow money. In the United States, the overnight rate is referred to as the federal funds rate, while in Canada, it is known as the policy interest rate. The rate increases when liquidity decreases (when loans are more difficult to come by) and decreases when liquidity increases (when loans are more readily available). As a result, the overnight rate is a good indicator of the health of a country's overall economy and banking system.

The Federal Reserve influences the overnight rate in the United States through its open-market operations. The overnight rate, in turn, has an effect on employment, economic growth and inflation. This rate has been as high as 20% in the early 1980s and as low as 0% after the Great Recession of 2007.

RELATED TERMS
  1. Federal Funds Rate

    The interest rate at which a depository institution lends funds ...
  2. Overnight Index Swap

    An interest rate swap involving the overnight rate being exchanged ...
  3. Sterling Overnight Interbank Average ...

    An index that the tracks Sterling overnight funding rates for ...
  4. Canadian Overnight Money Market ...

    A measure or estimate of the rate at which major dealers are ...
  5. Overnight Limit

    The number of currency positions a trader can carry over from ...
  6. Target Rate

    The interest rate charged by one depository institution on an ...
Related Articles
  1. Investing

    Overnight Rate

    Learn about how banks use this interest rate when lending to other banks.
  2. Economics

    What's the Federal Funds Rate?

    The federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.
  3. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  4. Economics

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  5. Economics

    Explaining the Federal Discount Rate

    The federal discount rate is the rate at which eligible banks or other depository institutions can borrow funds from a Federal Reserve bank.
  6. Economics

    Understanding the Bank Rate

    Bank rate is a term describing the interest rate a country’s central bank charges its domestic banks on loans it makes to them.
  7. Economics

    How Central Banks Control The Supply Of Money

    A look at the ways central banks pump or drain money from the economy to keep it healthy.
  8. Investing News

    Hungary First Emerging Market to Adopt NIRP

    On Tuesday, the National Bank of Hungary cut its overnight deposit rate to -0.05%, becoming the sixth central bank to charge banks to deposit money with it.
  9. Investing Basics

    How Banks Set Interest Rates On Your Loans

    On the face of it, figuring out how a bank makes money is a pretty straightforward affair. A bank earns a spread on the money it lends out from the money it takes in as a deposit. The net interest ...
  10. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
RELATED FAQS
  1. How do central banks impact interest rates in the economy?

    Learn how central banks such as the Federal Reserve influence monetary policy in the economy by increasing or decreasing ... Read Answer >>
  2. What are the implications of a high Federal Funds Rate?

    Learn the implications of a high federal funds rate, which include constriction of the money supply, a stronger dollar and ... Read Answer >>
  3. Is the prime rate in the US different from the federal funds rate?

    Learn how the federal funds rate affects fluctuations in the prime rate and how following your bank's prime rate can help ... Read Answer >>
  4. What are the most important interest rates?

    Learn about the most important interest rates in the economy; the Federal funds rate and discount rate are set by the Federal ... Read Answer >>
  5. How does a depository bank benefit from issuing an ADR for a foreign company for ...

    For domestic investors the benefits of increasing the portion of their portfolio that they invest in foreign companies is ... Read Answer >>
  6. How does the Federal Reserve determine the discount rate?

    Learn about the several different kind of discount rates offered to banks and other depository institutions through the Federal ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center