Interbank Rate Explained 2025: Definition, How It Operates & Current Rates

Adam Hayes, Ph.D., CFA, brings over 15 years of Wall Street expertise as a derivatives trader and financial analyst. He holds advanced degrees in economics and sociology and currently teaches at Hebrew University in Jerusalem, specializing in economic sociology and finance.

Understanding the Interbank Rate in 2024

The interbank rate represents the interest charged on short-term loans exchanged between banks in the United States. These transactions help banks maintain liquidity or invest excess funds efficiently. Typically, these loans are overnight or span no longer than a week.

In addition to domestic loans, the term also applies to the rates banks use when trading foreign currencies with international counterparts.

Key Highlights

• The interbank rate, often known as the federal funds rate, is the benchmark interest rate on short-term loans between financial institutions.
• It also refers to the currency exchange rates banks use in wholesale foreign exchange transactions.
• These rates are the lowest available at any given time, reserved exclusively for large, creditworthy banks.

How the Interbank Rate Functions

Banks are mandated by regulators to hold sufficient reserves to meet daily withdrawal demands. To manage these liquidity needs, banks borrow or lend funds among themselves, earning or paying interest based on the prevailing interbank rate.

While the Federal Reserve influences this rate through its discount rate and target range, the actual interbank rate is determined by the banks in these transactions. This dynamic rate serves as a crucial economic lever; lowering it stimulates borrowing and economic activity, while raising it helps control inflation.

Historical context: In response to the 2008 financial crisis, the Federal Reserve reduced the target federal funds rate to near zero, maintaining it for years to spur recovery. After incremental hikes culminating in 2018, rates were again lowered during the 2020 pandemic crisis. As of mid-2024, the target rate stands at approximately 5.5%.

Note that consumers do not directly access this rate; instead, consumer loan and savings rates are influenced by the interbank rate plus additional premiums reflecting credit risk and market factors.

Important Reminder

The interbank rate is exclusively accessible to the largest financial institutions and is not available to individual consumers.

The Interbank Rate in Foreign Exchange Markets

Another critical aspect of the interbank rate lies in the foreign exchange market, where global banks trade currencies at wholesale rates. These interbank exchange rates fluctuate constantly during market hours and serve primarily to manage banks’ currency and interest risks.

While these rates are visible in online currency converters, consumers exchanging money typically face added premiums above the interbank rate to cover service costs and profit margins.

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