The Sterling Overnight Index Average SONIA is the effective overnight interest rate paid by banks for unsecured transactions in the British Sterling GBP or market.

Sonia meaning libor. Rate over a given period. The Sterling Overnight Index Average SONIA is administered by the Bank and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions. There has been significant interest in the development of Term SONIA in the loan market in the hope that it will be a lower risk equivalent to LIBOR LIBOR also being a forward-looking term reference rate.

Our Monetary Policy Committee decides what monetary policy action we take as a central bank. Term SONIA refers to a forward-looking term reference rate based on overnight SONIA. LIBOR includes a credit element to reflect the cost and risk to banks of lending over a term period As SONIA is an overnight rate the risk of lending is lower The SONIA rate is therefore typically lower than LIBOR To ensure a fair conversion of existing contracts a small adjustment is needed to account for this difference.

Changing from using the Libor rate to the Sonia rate appears to be an attempt by the BoE to include fund managers and non-financial companies that issue debt as well as bankers in setting commercial sterling interest rates. SONIA is the Working Group on Sterling Risk Free Reference Rates preferred benchmark for the transition to sterling risk-free rates from Libor. SONIA Sterling Over Night Index Average is the effective reference for overnight indexed swaps for unsecured transactions in the Sterling market.

SONIA can be compounded to be used in term contracts. Sonia is the effective reference overnight rate for unsecured transactions in the sterling market overseen by the Sonia advisory committee part of the Bank of England. LIBOR is published for seven different lengths of interest period but SONIA is an overnight rate LIBOR is forward looking whereas SONIA is backward looking - the rate of SONIA cannot be determined until the end of the applicable period.

Term SONIA is a forward-looking rate similar to LIBOR. SONIA is robust and sustainable given the volume of transactions underpinning it. The SONIA itself is a risk-free rate.

Unlike LIBOR which is fixed in advance for a set period eg. Unlike SONIA it is not necessarily based on actual transactions. Unlike LIBOR a term SONIA rate would not reflect term bank credit risk.