What are reference interest rates?

Reference interest rates, sometimes called benchmark interest rates, are interest rates that are used as the basis for financial contracts, such as floating-rate mortgage loans and other bank loans. For example, a bank can extend a mortgage loan to a household at a reference rate (e.g. the 12-month EURIBOR) plus a spread (e.g. 1%), such that if the reference rate rises, so does the cost of the loan, and if the reference rate falls, the cost of the loan also decreases. Reference interest rates are also used to calculate bank overdraft fees and deposit rates.

The most common reference rates are the so-called interbank rates, such as the EURIBOR or the €STR (which recently replaced the EONIA), which are the interest rates that banks and other intermediaries charge when they lend to one another. This information helps central banks gauge how monetary policy is transmitted to the interbank market.

Reference interest rates should be accessible to all and calculated in a transparent manner. The most widely used reference interest rates in the euro area are:

  • The €STR (Euro Short-Term Rate). This is the new euro area interbank rate which reflects the overnight borrowing costs of euro area banks at market rates. The European Central Bank (ECB) started publishing the €STR in October 2019 to replace the EONIA (Euro Overnight Index Average), which was calculated by the European Money Markets Institute (EMMI)Opens in new window . To ensure that the market had enough time to transition to the €STR, the EONIA continued to be calculated as the €STR plus a spread until its discontinuation on 3 January 2022.
  • The EURIBOR (Euro Interbank Offered Rate), which is the reference interest rate on the unsecured market for different maturities (one week and one, three, six and twelve months). The EURIBOR is calculated by the EMMI. This institution defines the EURIBOR as “the rate at which wholesale funds in euro could be obtained by credit institutions in current and former European Union and European Free Trade Association countries in the unsecured money market”. The “money market” refers to the market where financial intermediaries lend money to one another. “Unsecured” means that the loans are not backed by collateral.

Since January 2020, the EURIBOR has been calculated using a hybrid model which makes use of actual transactions, but also relies on historical data and expert opinion when insufficient information is available. Previously, the EURIBOR was based on surveys measuring the interest rate at which banks were willing to lend money to other banks for each maturity. The 12-month EURIBOR is very important in the Spanish financial system because it is the standard reference rate for floating-rate mortgage loans and other loans.