Business, Legal & Accounting Glossary
The interest rate used in repo transactions, often set by the central bank.
Repo rate, is short for repurchase rate and is also known as the official bank rate. Repo rate is the discounted interest rate at which a central bank repurchases government securities. The central bank makes this transaction with commercial banks to reduce some of the short-term liquidity in the system. The repo rate is dependent on the level of money supply that the central bank chooses to set as part of its monetary policy.
The entity borrowing the security is often referred to as the buyer, while the lender of the securities is referred to as the seller.
The central bank has the power to lower the repo rates while expanding the money supply in the country. This enables the banks to exchange their government security holdings for cash. In contrast, when the central bank decides to reduce the money supply, it implements a rise in the repo rates.
When the central bank of the nation makes a decision regarding the money supply level the repo or repurchase rate is determined by the market in response to the rules of supply and demand.
The securities that are being evaluated and sold are transacted at the current market price plus any interest that has accrued. When the sale is concluded, the securities are subsequently resold at a predetermined price. This price is comprised of the original market price and interest, and the pre-agreed interest rate, which is the repo rate.
A repo rate or repurchase rate is primarily applied when banks borrow money from the national or federal reserve. If repo rates are reduced it enables banks to get money at a reduced rate. If the repo rate goes up, borrowing money from reserve gets more expensive.
The reverse repo rate or reverse repurchase rate is applicable when a country’s reserve borrows money from banks. If reverse repo rates rise it means that banks will provide more funds to the reserve. This is a safe proposition as lending money to most reserves is an extremely safe financial transaction. In cases of reserves borrowing money from banks, excess money left with the particular bank is channelled into the reserve. This causes money to be taken out of the economic system. Reverse repo rates come into play when there is a fund shortage being faced by the reserve.
When the federal reserve buys money off the market the effect is often a reduction in inflation.
The repo rate is the interest rate at which reserve banks borrow from banks. Conversely, the bank rate is the interest rate at which banks borrow from the reserve. The interbank rate is the interest rate at which banks borrow from each other.
repurchase rate, official bank rate
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This glossary post was last updated: 26th April, 2020 | 0 Views.