The Interbank Rate, also known as the federal funds rate, is the interest charged on short-term loans made between financial institutions. The term "interbank rate" may also refer to the foreign exchange rates paid by banks when they trade currencies with other banks. The interbank lending market is where banks go to borrow and lend money from each other. This market is important because it influences the cost of borrowing for both businesses and consumers.When demand for loans is high, lenders charge a higher interest rate to borrowers in order to make a profit. This higher interest rate gets passed down through the banking system and results in higher lending rates for businesses and consumers alike. On the flip side, when there is less demand for loans, lenders will lower their interest rates in order to encourage borrowing and keep their business competitive.
