Call Rate: Understanding Ultra-Short-Term Interest Rates and Their Impact
3 min read · · Korean original
Contents 4
A capitalist economy has many different kinds of interest rates. The base rate, short-term rates, long-term rates and others each play a different role in the economy and financial markets. Among them, the call rate is one form of short-term rate and serves as a key market signal. In this post, we'll take a quick and easy look at the call rate. 🙂
1️⃣ What Is a Short-Term Interest Rate?
A short-term interest rate refers to the rate on a term of less than one year in financial markets. It is the interest rate that financial institutions or companies pay when they raise short-term funds or take out loans. Among these, the 91-day short-term rate, with a term of about three months, is commonly used. Short-term rates help you gauge the liquidity and funding conditions of financial institutions, and when they rise, deposit and loan rates are also likely to go up. Major short-term rates include the call rate, the CD rate and the CP rate.
2️⃣ What Is the Call Rate?
📞 The call rate is the interest rate applied when financial institutions lend and borrow ultra-short-term funds from one another, usually for just a day or two. "Call" refers to a phone call, describing the situation where a financial institution that is short on funds asks another bank for emergency cash. The interest charged in this case is the call rate. Banks call other banks to carry out these transactions and secure the funds they need, and this is how the call rate is formed.
3️⃣ Factors That Determine the Call Rate
The call rate is influenced by a number of factors. The main ones are as follows.
- The reserve position of the banking sector
- The issuance and redemption of bonds
- Short-term funding demand from businesses and households
- How financial institutions manage their short-term funds
Taking all of these factors into account, the call rate presented by the Bank of Korea is determined.
4️⃣ How the Call Rate Affects the Market
Because the call rate reflects banks' funding conditions, it is an important indicator for reading the market. When banks request call loans frequently, the call rate rises. This shows that banks are short on funds in the financial market, and it can be interpreted as a sign of an economic slowdown. Conversely, when banks have plenty of funds, the call rate falls. In short, the call rate is used as an important indicator of the flow of the economy and changes in financial markets.
To put it simply, the call rate is the interest rate formed through ultra-short-term lending between financial institutions, and it plays an important role in understanding funding conditions in the market and the state of the economy. We hope this post has helped you better understand what the call rate is and the role it plays. 💡
