Benchmark interest rate

The benchmark interest rate is the minimum rate of return investors will accept for buying non-treasury (non-government) securities. The reason for having a benchmark interest rate is to have a standard that can be used to compute for or derive the other interest rates.

The benchmark interest rate is just a minimum, so for most interest rates, a certain percentage is added to the benchmark interest rate, with the amount added commensurate to the risk of the investment/loan. Investments that are pegged at benchmark interest rates are viewed as very safe or stable investments.

The benchmark interest rates vary for each region. In the United States, the benchmark interest rate that people are most familiar with is the federal funds rate. The federal funds rate dictates the inter-bank lending rates in the USA. In the United Kingdom, an example of a benchmark interest rate would be the base rate or the official bank rate, which is set by the Bank of England. It dictates the minimum interest rate for loans. Another benchmark interest rate in the United Kingdom is the London InterBank Offer Rate (LIBOR), which like the federal funds rate dictate the inter-bank lending rates. In Australia, the benchmark interest rate is determined by the Reserve Bank of Australia’s Board with their official interest rate called the cash rate.

Benchmark interest rates differ not only by region but also by currency. In most countries, benchmark interest rates are only listed for the major currencies commonly used and traded in that country.

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