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Glossary

Overnight Rate

The interest rate charged on money borrowed between financial institutions for one night, typically set by or closely tied to a central bank's policy target.

What Is an Overnight Rate?

An overnight rate is the interest rate charged on money that one financial institution borrows from another for a single night. Banks and other financial firms must settle their accounts each day, and some end the day short of cash while others have extra. The overnight rate is the price of covering that gap until the next business day. Because the loan is so short, the rate tends to move closely with the central bank's policy settings.

How It Works

Large financial institutions hold accounts with the central bank and must meet settlement and reserve requirements at the end of each day. When one institution is short of funds, it can borrow from another that has surplus balances, usually overnight. Some of this borrowing is unsecured, meaning no collateral is pledged. Other borrowing is secured, meaning the borrower posts securities as collateral in a repurchase agreement. Each market produces its own overnight rate, and these are published daily.

Central banks influence overnight rates through monetary policy. They typically announce a target level or range and use tools such as open market operations and standing lending facilities to keep the market rate near that target. When the target rises, overnight rates generally rise too, and borrowing costs across the economy tend to follow.

Why It Matters to Investors

Overnight rates anchor many other interest rates. Short-term lending rates, money market yields, and expectations built into longer-term bond yields all react to changes in overnight rates. Investors watch these rates to understand what a central bank may do next. Shifts in policy can affect stock valuations, bond prices, and currency values.

Overnight rates can also move away from their target for short periods. Heavy demand for cash around reporting deadlines or month-end is one common cause.

Key Examples

In the United States, the federal funds rate is the best-known overnight rate. It reflects unsecured overnight loans between banks. The Secured Overnight Financing Rate (SOFR) is another U.S. overnight benchmark, based on repurchase agreements backed by Treasury securities. Other countries publish their own overnight rates, so readers should check which rate a given report refers to.

Updated October 27, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Repurchase Agreement (Repo)

A repurchase agreement is a short-term borrowing arrangement in which one party sells securities to another and agrees to buy them back at a slightly higher price on a set date.

Monetary Policy

Monetary policy is the set of actions a central bank takes to manage money supply, credit conditions, and interest rates in order to pursue goals such as stable prices and employment.

Money Market

A money market is the market where short-term, highly liquid debt securities with low credit risk are bought and sold, mainly to help governments, banks and businesses manage cash.

Bond Yield

A bond yield is the annual return an investor earns from holding a bond, expressed as a percentage of its price, reflecting coupon income and any gain or loss relative to the amount paid.

Federal Funds Rate

The federal funds rate is the target interest rate for overnight loans of reserve balances between U.S. banks, set by the Federal Reserve's policy committee.

Yield Curve

A yield curve is a graph that plots the interest rates, or yields, of bonds with the same credit quality but different maturities, showing how borrowing costs change with time.