Interest rates

	Central bank discount rate
	Intervention rate
	The discount rate
	Money market rates
	LIBOR and variants

Central bank discount rate
Within the constraints of market pressures, central banks manage their banking systems to keep liquidity and short-term interest rates at or near to officially desired levels. To this end, they can:

	Intervene in the interbank money market to manage the daily balance of supply and demand;
	Often publish formal discount rates at which they provide money to commercial banks to help smooth longer (say, weekly) financing needs;
	Pccasionally impose penal rates for emergency lending to banks.

In general discount rates have more of a psychological importance than a direct influence over market rates and the cost of money. Central banks tend to implement their policies by intervening in the markets to control an implicit or explicit target such as the Fed funds rate in the US.

Intervention rate
The intervention rate is the rate at which the central bank intervenes in the interbank market to manage day-to-day liquidity.

Some countries have formal intervention rates which are changed only irregularly. Other countries have less formal systems and add liquidity when necessary at a rate which is appropriate to supply, demand and the official interest rate policy.

Repo rate
This is a sale and repurchase agreement where one financial dealer sells, say, bonds to another with agreement to buy them back at a given price on a given date.

The discount rate
Specifically, the discount rate is the rate at which central banks discount (buy), rediscount, or lend against eligible paper. Such finance typically has a maturity of up to 1 - 2 weeks.

Eligible paper
This ranges from Treasury notes in Australia to a whole range of industrial and commercial paper, Treasury bills and Treasury bonds in the US.

Quantity
There are usually limits on the quantity of paper that can be discounted. Additional borrowing is at penal rates based on the discount rate (for example, Italy and Sweden) or identified separately (the German Lombard rate).

Rate
The discount rate is usually set by administrative decision.

Money market rates
Money markets are the markets in which banks and other intermediaries trade in short-term financial instruments.

The hub is usually the interbank market (called the Federal funds market in the US), which is where banks deal with each other to meet their reserve requirements and, longer-term, to finance loans and investments.

Very short-term interbank interest rates are largely determined by central bank intervention, although market pressures are also influential. For other maturities and other financial instruments, relative maturities and credit risks are also important.

Maturity
Loans in the short-term market range from call (repayable on demand) and overnight to 12-month money. Interest rates on 12-month paper are higher than on shorter maturities if market participants expect interest rates to rise, or lower if rates are expected to fall. Supply and demand imbalances can cause temporary interest rate bulges at various maturities. It is not unknown for overnight money to top 100% on rare occasions.

Credit risk
Treasury bills (loans to the government) are regarded as completely safe in the major industrial countries and command the finest (lowest) interest rates, usually below interbank rates. Interest rates are higher on certificates of deposit (CDs - bank deposits which can be sold) and, usually, higher still on corporate or commercial paper (loans to companies).

LIBOR and variants
Interbank rates are quoted bid (to borrow) and offer (to lend). The London interbank offered rate (LIBOR) is a benchmark. The interest rates on many credit agreements worldwide are set in relation to it; for example, as LIBOR plus 0.5%. Most major financial centres have LIBOR equivalents, such as AIBOR, FIBOR and PIBOR in Amsterdam, Frankfurt and Paris.

There is no direct equivalent in the US. Its interbank market is the Federal funds market, while the base for loan contracts is the prime rate (the rate charged to borrowers with prime or excellent creditworthiness). However, whereas LIBOR changes constantly under the direct influence of supply and demand, the prime rate is set by the banks (with reference to market rates) and is changed less regularly.