How much does your money cost?
Nope, we’re not talking about the cost of the paper or the ink used to print money. Though that might make an interesting article too. Do you know how much your money costs you? It’s a strange concept. It seems obvious that a €5 note costs and is worth €5. But if you go to the bank and “buy” €5, the price will be 5€ plus interest. A-ha! That’s how much money costs.
The price of the Euro
In our economy, banks buy and sell money from each other in the money market under the supervision of the European Central Bank. These banks charge each other an interest rate for the money borrowed, depending on the term of the loan.
A panel of 26 banks provide daily quotes of the rate at which they believe a prime bank is quoting to another prime bank for interbank term deposits. The choice of banks quoting is based on market criteria (e.g. the ones with the highest volume of business in the euro zone money market) and ensures that the diversity of the euro money market is adequately reflected.
The highest and lowest quotes are eliminated, and the remainder are averaged (truncated mean) to give the relevant Euribor (Euro Interbank Offered Rate) rate, the daily reference rate of the euro money market since 1999.
Similarly, Libor or London Interbank Offered Rate, is the reference rate for other main currencies such as the British pound sterling and the US dollar since 1986.
How this affects your money
The same way the baker passes on to the buyer the cost of flour, eggs and sugar used to make a cake, banks pass on the cost of borrowing money to their clients when they charge interest for loans. Many euro consumer loans are based on Euribor plus a commercial margin, such as certain types of mortgages, while others might have a less direct relationship with the reference rate.
And the same is true for savings! The more your bank receives from other banks for the money it lends, the more it will pay you on your deposits.
There are different Euribor rates depending on the term of the loan/deposit. You can check the current Euribor rates here.
Do you know how much you are paying for your loan?
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