UK base rates and Fed funds rates
Posted: April 27th, 2020, 3:05 pm
Hi,
Just lately I've been trying to research the subject of yield curves and periodically hit upon the concept of "base rates". What I can't quite figure out is what does the Bank of England's base rate (currently at 0.1%) really mean?
Does it mean this is the rate which the BoE will lend to our commercial banks (and similarly the rate it gives to savings held there) or is it just the minimum (and enforced by law) rate which *any* lender in the economy is permitted to lend at?
Secondly, would I be correct in saying that "Fed funds rate" is actually different:
https://www.global-rates.com/interest-r ... -rate.aspx
The description from the above link actually seems a bit vague:
Federal funds rate
When reference is made to the US interest rate this often refers to the Federal Funds Rate. The Federal Funds Rate is the interest rate which banks charge one another for 1 day (overnight) lending. This American base rate is set by the market and is not explicitly laid down by the FED. By withdrawing or adding funds to the money supply the FED tries to bring the effective federal funds rate into line with the interest rate that it is striving for. If the FED’s monetary policy alters the base rate, that usually affects the interest rate on various products such as mortgages, loans and savings.
It seems like the description is stating that the FFR is 1) a mandated rate which it attempts to force it's banking community to lend to each other for 1 day lending and 2) something almost immeasurable, i.e. a short term rate (presumably set live by market trading of TBs?), which the FED *attempt* to set by open market operations.
EDIT: I've just reread the italicised paragraph above, perhaps what the link very poorly explains, is actually two separate, but related rates - i.e. the FFR (which is the interbank 1 day lending rates window) and secondly the "base rate" - that due to the money markets.
Can anyone help me out here, re. the BoE and US situations?
thanks Matt
Just lately I've been trying to research the subject of yield curves and periodically hit upon the concept of "base rates". What I can't quite figure out is what does the Bank of England's base rate (currently at 0.1%) really mean?
Does it mean this is the rate which the BoE will lend to our commercial banks (and similarly the rate it gives to savings held there) or is it just the minimum (and enforced by law) rate which *any* lender in the economy is permitted to lend at?
Secondly, would I be correct in saying that "Fed funds rate" is actually different:
https://www.global-rates.com/interest-r ... -rate.aspx
The description from the above link actually seems a bit vague:
Federal funds rate
When reference is made to the US interest rate this often refers to the Federal Funds Rate. The Federal Funds Rate is the interest rate which banks charge one another for 1 day (overnight) lending. This American base rate is set by the market and is not explicitly laid down by the FED. By withdrawing or adding funds to the money supply the FED tries to bring the effective federal funds rate into line with the interest rate that it is striving for. If the FED’s monetary policy alters the base rate, that usually affects the interest rate on various products such as mortgages, loans and savings.
It seems like the description is stating that the FFR is 1) a mandated rate which it attempts to force it's banking community to lend to each other for 1 day lending and 2) something almost immeasurable, i.e. a short term rate (presumably set live by market trading of TBs?), which the FED *attempt* to set by open market operations.
EDIT: I've just reread the italicised paragraph above, perhaps what the link very poorly explains, is actually two separate, but related rates - i.e. the FFR (which is the interbank 1 day lending rates window) and secondly the "base rate" - that due to the money markets.
Can anyone help me out here, re. the BoE and US situations?
thanks Matt