Overnight Rate

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

RELATED TERMS
  1. Federal Funds Rate

    The interest rate at which a depository institution lends funds ...
  2. Bank Rate

    The interest rate at which a nation's central bank lends money ...
  3. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  5. Overnight Index Swap

    An interest rate swap involving the overnight rate being exchanged ...
  6. Prime Rate

    The interest rate that commercial banks charge their most credit-worthy ...
Related Articles
  1. The Federal Reserve
    Economics

    The Federal Reserve

  2. Forces Behind Interest Rates
    Economics

    Forces Behind Interest Rates

  3. How Interest Rates Affect The Stock ...
    Investing Basics

    How Interest Rates Affect The Stock ...

  4. A Look At Fiscal And Monetary Policy
    Economics

    A Look At Fiscal And Monetary Policy

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center