We at the ECB, for example, can refer to benchmark rates in our work to keep prices stable in the euro area. Benchmark rates help central banks to do their jobīenchmark rates can also inform the work done by central banks. Other uses of benchmark rates include (but are not limited to): the calculation of overdraft penalties on cash accounts, the calculation of interest on some retail deposits, and the agreement of interest on retail mortgages and loans. This creates transparency for all parties involved, brings some standardisation to the agreement and, as a result, makes it easier for all parties to negotiate. In swaps like these, the benchmark rate may determine at least one of the interest rates being exchanged. In this case, the benchmark can be a reliable, independent, and relatively simple reference for all involved.Ĭompanies, banks and other organisations also use benchmark rates to value items on their balance sheets – in other words these rates make it easier for an accountant to work out how much organisations (more specifically the financial assets that they own) are ultimately worth.īenchmark rates are also used in more complex financial transactions, such as the issuance of securities with variable rates, options, forward contracts and swaps.įor instance, take an interest rate swap – in very broad terms it is a transaction involving two parties, where each agrees to cover the other’s interest payments. So, the cost of the loan goes up if the benchmark rate goes up, and the cost of the loan goes down if the benchmark rate drops.
#BENCHMARK MEANING PLUS#
But what is it exactly that makes them so important? And why are they currently undergoing reforms? Why are benchmark rates important? They are widely used across our economyīenchmark rates are widely used by individuals and organisations throughout the economic system.įor example, banks use them when lending to individuals or corporate clients.Ī bank might agree to lend money to a company at an agreed interest rate that is set at a particular benchmark rate plus 2% – meaning that the company would pay interest of 2% more than the current benchmark rate. This means that these benchmark rates play a key role in the financial system, the banking system and the economy overall. Alternatively they might reflect how much it costs banks to obtain funds from other sources, such as pension funds, insurance companies and money market funds. For example, they might reflect how much it costs for banks to borrow from each other. They are a useful basis for all kinds of financial contracts such as mortgages, bank overdrafts, and other more complex financial transactions.īenchmark rates are calculated by an independent body, most often to reflect the cost of borrowing money in different markets. Interest rate benchmarks – also known as reference rates or just benchmark rates – are regularly updated interest rates that are publicly accessible.
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