What definition for Bank Rate (BR) should I use?

11

In my textbook, it says the BR is the rate of interest that the Bank of England (BoE) pays to commercial banks on their deposits held at the BoE. However, a quick search says that this rate of interest is actually called the Deposit Rate that is set relative to the BR, usually lower. The BR is in fact a reference/benchmark rate set to influence the overall cost of borrowing and lending in the UK economy.

I think my textbook has oversimplified the definition. Does this mean I use the Bank Rate as a substitute for the Deposit Rate, or do I ignore my textbook & use both terms? I'm thinking of only using the real definition when discussing the actions of the BoE, but otherwise sticking to the textbook definition when discussing the actions of commercial banks.

Reply 1

klafow

14

Interest rates and Bank Rate | Bank of England
i have never heard of the deposit rate before
technically, your textbook has oversimplified the definition but its still correct. if the BoE sets a high bank rate for commerical banks, this increases the interest rate on their deposits. commercial banks will then pass these costs on to consumers through higher interest rates on consumers loans and mortagages, therefore influencing the overall cost of borrowing and lending in the UK.
do what you wish, but i would check your exam board specification to see if they have a clearer definition for bank rate, and if that doesn't exist then just stick with your textbook (on the assumption that its the exam board approved one)

Reply 2

TSR360

OP

11

Original post

by klafow

Interest rates and Bank Rate | Bank of England
i have never heard of the deposit rate before
technically, your textbook has oversimplified the definition but its still correct. if the BoE sets a high bank rate for commerical banks, this increases the interest rate on their deposits. commercial banks will then pass these costs on to consumers through higher interest rates on consumers loans and mortagages, therefore influencing the overall cost of borrowing and lending in the UK.
do what you wish, but i would check your exam board specification to see if they have a clearer definition for bank rate, and if that doesn't exist then just stick with your textbook (on the assumption that its the exam board approved one)

Thanks for clearing that up, but I've also read that the BoE is essentially a bank for commercial banks. Does this mean that the BR should also be treated as the rate of interest which commercial banks pay to the BoE when they are borrowing money from them? According to Gemini, the Bank of England offers a separate facility called the Standing Liquidity Facility (SLF) for banks that need short-term liquidity, which allows them to borrow reserves overnight at a penalty rate set relative to the Bank Rate (with other factors in mind), usually above it. In my textbook, it only mentions banks borrowing from other institutions, where SOFR, now that LIBOR is no more, acts as a reference rate off which the interest rate of loans are determined. Do I therefore ignore the SLF penalty rate and focus solely on SOFR, or do I mention both in my arguments?

(edited 1 year ago)

What definition for Bank Rate (BR) should I use?

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