Finance Q: Base Rate & Market Rate??

[johnnywb]

Can anyone inform me of what the difference is between the 'Official Interest Rate' & 'Market Rate' on this page http://markets.ft.com/markets/bonds.asp

I'm not looking for the numerical answer! I know what the official base rate is, but can't work out what the market rate is representing.

Thanks

[_James]

You have hit upon the entire problem of monetary policy - the central bank actually controls sod all.

[johnnywb]

So, the official interest rate is the one set by the Bank of England.

Where does the market rate come from? It's update regularly, so presumably it's the rate at which deals are being done, but which deals?!

[_James]

When banks lend money to each other. Basically, every bank is asked each morning what they hypothetically would lend at. Thats the market rate.

The idea is that, if the central bank supplies credit cheaper, banks reduce their own rate. However, the last month that linkage has effectively been broken.

[Graham]

Then compare it to the rate you'll get offered if you want a loan 15% plus anyone !!!

[_James]

Actually, I missed the section at the bottom - not sure how that data is compiled.

[johnnywb]

_James said:

When banks lend money to each other. Basically, every bank is asked each morning what they hypothetically would lend at. Thats the market rate.

The idea is that, if the central bank supplies credit cheaper, banks reduce their own rate. However, the last month that linkage has effectively been broken.

OK, so how does that differ from LIBOR? I thought LIBOR was the rate they lent to each other. Is the market rate effectively what their base retail lending rate is?

[2something]

johnnywb said:

Can anyone inform me of what the difference is between the 'Official Interest Rate' & 'Market Rate' on this page http://markets.ft.com/markets/bonds.asp

I'm not looking for the numerical answer! I know what the official base rate is, but can't work out what the market rate is representing.

Thanks

Neither can I, are they repo rates or something ?

Edited by 2something on Tuesday 14th October 10:25

[johnnywb]

2something said:

johnnywb said:

Can anyone inform me of what the difference is between the 'Official Interest Rate' & 'Market Rate' on this page http://markets.ft.com/markets/bonds.asp

I'm not looking for the numerical answer! I know what the official base rate is, but can't work out what the market rate is representing.

Thanks

Neither can I, are they repo rates or something ?

No idea! It's a funny one. I have assumed that it is the acutal 'base rate' the banks are using in their loans, but no one seems to be able to provide a clear definition.

Edited by 2something on Tuesday 14th October 10:25

[bluevelvet]

briefly, base rate is the rate that BofE will lend money to the commercial banks at from one day to the next overnight...the market rate appears to be the rate for o/n money between the commercial banks...this can be above and below the current base rate on a daily basis, depending on supply and demand of money in the system....recently...lack of supply from commercial banks, unwilling to lend, meant the o/n market rate went straight up....commercial banks prefering to give the money to central banks rather than other commercial banks who they did not trust to be solvent in the near term.....So central banks have flooded the markets with liquidity, which has increased the supply side of the scenario down...hence reducing the market rate or price of money.

the libor rates are daily rate fixes of monthly money lent/borrowed between commercial (not central) banks out to 1 year term.....these have recently gone way above usual spreads to average overnight money trading levels as for reasons above, would you want to lend to a counterparty with the risk they may turn out to be another n/rock, lehman, hbos etc...

The o/n market rates may well trade well below base rates for a while as the central banks over supply liquidity to bring the average rate for the month down nearer to the base rate....

Yesterday 3m £ libor was 6.27%...if you consider they may have lent at .60 over base (4.50) on a mortgage, by covering this in with 3mth interbank money (as per N rock/hbos model) they would lose 1.17% over the 3m period...they couldn't do this forever...

Gotta run, call over the tannoy, spillage in aisle 3 needs clearing up

[johnnywb]

bluevelvet said:

briefly, base rate is the rate that BofE will lend money to the commercial banks at from one day to the next overnight...the market rate appears to be the rate for o/n money between the commercial banks...this can be above and below the current base rate on a daily basis, depending on supply and demand of money in the system....recently...lack of supply from commercial banks, unwilling to lend, meant the o/n market rate went straight up....commercial banks prefering to give the money to central banks rather than other commercial banks who they did not trust to be solvent in the near term.....So central banks have flooded the markets with liquidity, which has increased the supply side of the scenario down...hence reducing the market rate or price of money.

the libor rates are daily rate fixes of monthly money lent/borrowed between commercial (not central) banks out to 1 year term.....these have recently gone way above usual spreads to average overnight money trading levels as for reasons above, would you want to lend to a counterparty with the risk they may turn out to be another n/rock, lehman, hbos etc...

The o/n market rates may well trade well below base rates for a while as the central banks over supply liquidity to bring the average rate for the month down nearer to the base rate....

Yesterday 3m £ libor was 6.27%...if you consider they may have lent at .60 over base (4.50) on a mortgage, by covering this in with 3mth interbank money (as per N rock/hbos model) they would lose 1.17% over the 3m period...they couldn't do this forever...

Gotta run, call over the tannoy, spillage in aisle 3 needs clearing up

thanks for that. So essentially;

Official Base Rate - rate at which central bank lends to commercial banks overnight
Market Rate - rate at which commercial banks lend to commercial banks overnight?
LIBOR - Commercial to commercial lending rates over a fixed period?

So, how does the Overnight LIBOR rate fit?!

For example, today;
Official Base - 4.5%
Market rate - 4.25% (last time i checked!)
O/N LIBOR - 5.6%

Is the market rate not a function of what the central bank is actually lending at, with the official rate smiply a point of comparison / fixed point for retail lending purposes?

So if there's high demand on central bank money, the market rate goes up. If there is less demand on it, it goes down?

[bluevelvet]

Libors are reference rates fixed at 11am in London.....factors such as money flows, economic news,,,or banks long/short excessive funds at the end of the day will have more influence on the daily flows of short dated money.

Reference rate used for loan, swap payments etc...