Overnight Rate

The overnight rate is the interest rate at which banks and financial institutions lend or borrow funds from each other for one day. It is a critical rate in the financial system because it influences short-term borrowing costs and is often used by central banks to implement monetary policy. Central banks, such as the Federal Reserve, may adjust the overnight rate to control inflation, stimulate economic growth, or maintain financial stability.

Example

The Federal Reserve raises the overnight rate to curb inflation, making short-term borrowing more expensive for banks, which can lead to higher interest rates for consumers.