Reference interest rate / Benchmark interest rate

The reference interest rate interest rate is a nominal interest rate, which is considered to be a guideline, typically quoted by an independent institution. For some loans with variable interest rates, the part of the interest rate reflects the changes in the market environment.

In all cases, the reference interest rate is a nominal interest rate quoted by an independent institution, usually a central bank, which is regarded as a guideline. For loans with variable interest rates, the actual interest to be paid is often composed by considering a reference interest rate as a base, which is supplemented by an interest surcharge, and the sum of these gives the transaction interests. Interest is what we have to pay to the creditor.  

For such loans, the reference interest rate interest rate embodies the variable market conditions, i.e. the variable interest rate environment during the term. The interest spread expresses the borrower risk from the bank point of view. For loan applicants with good creditworthiness, the interest rate is lower. In the case of smaller, risky businesses, where the risk of non-repayment of the loan is greater, the interest surcharge is usually higher.

It is therefore important that the interest rate chosen as the reference interest rate accurately reflects the market conditions of the relevant environment for the lending bank and the borrower, and that neither party is in a position to influence it. Commonly used reference interest rates are, for example, EURIBOR (European Reference Interbank Interest Rate), which is calculated based on the interest rate on loans granted to each other by eurozone banks. Such a reference interest rate is difficult to influence because it is made up of the transactions of too many actors. It is a fact, however, that there have been attempts to influence such an indicator in history - the LIBOR (London Interbank Interest Rate), for example, was discontinued because it was discovered that its value had been manipulated.  

Many financial institutions offer loan products tied to the reference interest rate. The advantage of these structures is that the reference interest rate interest rate is not determined by the banks, but by market and economic events, so the bank can only decide on a part of the interest to be paid when the loan agreement allows it (for example, it does not allow it for fixed interest loans). 

If we have a vision of where the world is going, where the economy is headed, then a well-chosen reference interest rate interest rate can even embody predictability for us. In addition, loans with variable interest rates are usually cheaper, i.e. you can get them at a lower interest than loans with fixed interest rates. The reason for this is that the bank does not have to take into account the risk associated with the market environment when granting such a loan, since the reference interest rate interest rate follows it. However, we should not get too carried away, events like the coronavirus epidemic and the subsequent energy crisis have shown that events can occur that can turn even the best ideas upside down very quickly.