Home >> Dictionary Of Banking >> Guardians Of The Poor to Or Mandate >> Market Rate

Market Rate

bank, money and brokers

MARKET RATE. The rate of discount charged by the London banks and bill brokers. It is always less than Bank Rate, but varies with it, though not by any means always in the same ratio. Competition in the money market has the same effect as it has in all other open markets ; that is, the competition between the sellers (in this case the banks and brokers who have money to lend) tends to keep the rate down, while the competition amongst buyers (in this case the discounters of bills and other borrowers of money) tends to raise the rate. There is another factor which influences the market rate, and that is that the lenders (the banks and brokers) are themselves also borrowers by way of deposits on which they have to pay interest : it is obvious then that the higher the rate of interest they allow on deposits the more they must charge for dis counts in order to recoup themselves and leave a fair margin of profit. And herein lies one of the reasons why market rate assimilates itself to Bank Rate, for the rate of interest which banks and brokers allow, known as deposit rate, is dependent on Bank Rate.

The more money there is in the market, that is, the larger the funds that are at anytime in the possession of the banks and brokers available for short loans and discounts, the greater is the discrepancy between market rate and Bank Rate, for it is then that the outside market is in a position to compete most successfully with the Bank ; and vice vers.i when the market is " short " its rate approaches close to Bank Rate. In ordinary circumstances a well-known example of this occurs every year during the January to March quarter ; for at this time a great amount of the floating money in the market has become locked up in the Bank of England owing to the large part of the assessed taxes, which are paid into the Government accounts at that period of the year ; this brings up market rate close on the heels of Bank Rate ; so soon, however, as the accumulated funds begin to be released again, which happens after the first few days of April, market rate rapidly falls away from Bank Rate. (See BANK RATE, DEPOSIT RATE, MONEY MARKET.)