By contrast, the Libor rate is based on assumptions banks make about their daily borrowing rate.
FORBES: Libor Trap: Banks Want Out But Regulators Won't Let Them Leave
Many analysts now expect it to keep its borrowing rate on hold at 6% in July.
On July 7, the central bank raised the overnight borrowing rate by six percentage points to 30%.
For LIBOR, a borrowing rate is set daily by a panel of banks for ten currencies and for 15 maturities.
ECONOMIST: A scandal over key interest rates is about to go global
Short-term interest rates such as the overnight bank borrowing rate and one-month and one- year Treasury bill rates are already close to zero.
Spain on Tuesday paid a higher borrowing rate on 2.6bn euros of six-month debt and the fact that yields on its outstanding debt have trickled higher has worried European officials.
In finding Barclays guilty of attempting to manipulate the important Libor borrowing rate, the benchmark rate for bank-to-bank lending, the Financial Services Authority (FSA) made an elliptical reference to this conversation.
The point is that somewhere along the line, there has to be an actual transaction involved - and the system for deriving the Barclays interbank borrowing rate from those transactions has to be entirely transparent.
At Prime Minister's Questions, Mr Cameron said the manipulation of the key Libor inter-bank borrowing rate by Barclays traders was "outrageous" and those responsible for "spivvy and probably illegal activity" should be held to account.
That is most likely to happen at the ECB's next meeting in March, when it is widely expected to cut the benchmark borrowing rate to 1.5%, from 2.0%, in an attempt to stimulate the wider euro zone economy.
And until it does, Scotland could find the cost of funding its share of the UK debt (around 75% if gross domestic product, at the point of independence) could be at a significantly higher borrowing rate than the UK currently faces.
That sounds like an attractive borrowing rate, and it may prove to be a good deal for many: If inflation and interest rates rise in the future, those who borrow at these fixed rates and invest at higher ones will earn a profit.
But, in recent months, a weakening of economic indicators and easing of underlying inflation pressures (falling oil, food and commodity prices) have led the central bank to take out its scissors and slash the borrowing rate (see: " An Ominous Signal From The Bank Of England").
As per Liam Halligan in the Sunday Telegraph: there is no such thing as a "risk-free rate" set by sovereigns anymore, and you get an unsustainable hike in the bank borrowing rate in Italy which sinks the aforementioned Italian banks and then the contagion spreads to France.
But there is a huge difference between borrowing from the Fed at near zero interest rates and borrowing at that rate in the Federal Funds market.
It has managed to stabilise the exchange rate by borrowing money from abroad and raising interest rates.
The effect has been most dramatic in the overnight rate for borrowing dollars.
ECONOMIST: When banks find it hard to borrow, so do the rest of us
Over the past two years, Polish central bankers have been hauling up the base rate for borrowing in order to keep up with the rapid pace of their economy's expansion.
It has long been against the rules for banks to engage in arbitrage by borrowing at the discount rate and lending in the Fed Funds market at a higher rate.
Now what is very striking is that the interest rate for borrowing for just a day on this market or for a month is massively greater than borrowing for a year - which is not what you would expect, and was not the case in April.
Traders ended their day seeing more flashing red screens as equities saw another session of huge drops, even after the U.S. Federal Reserve, European Central Bank, and central banks in Britain, Canada, Sweden and Switzerland said they were all cutting the benchmark rate of borrowing by 0.5%.
In the current money market conditions, where banks have to approach the central bank for borrowing, the overnight lending rate is in fact the key operational policy rate.
Annual percentage rate is the annual rate charged for borrowing.
However, during unusual periods of reserve shortages in the banking system, the Federal Funds rate would be bid up above the discount rate and trigger borrowing from the Fed.
And Mr. Geithner's argument that British regulators were ultimately responsible might have been faulty given the fact Libor is a global interest rate that affects borrowing costs for U.S. corporations and consumers.
You need to read the speech for the full explanation, but the basic idea is that higher inflation can help push down the real cost of borrowing - the real interest rate - at times when nominal interest rates can't go any lower.
Though the bank has announced three rate cuts since then, the cost of borrowing still remains high, with the RBI's key rate currently at 7.75%.
Back then, the dramatically low federal funds rate was enough to spur a wave of borrowing by companies and individuals, so much so that a series of 17 rate increases followed from June 2004 to June 2006 as the Fed tried to temper inflation in a boom period.
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