The Sterling Overnight Index Average (SONIA) is the effective overnight interest rate that banks pay to borrow sterling overnight from other financial institutions. It’s used for overnight funding of trades that occur in off-hours and indicates the depth of business in the marketplace in these hours.
SONIA is calculated using data from banks across the UK on any transactions completed in the previous trading day. The BoE filters out unusual patterns and calculates a weighted average of all transactions over £25 million. The top and bottom 25% are removed, and a mean is taken from the middle 50%. This is rounded to the nearest four decimal places, which is the SONIA rate.
What is the SONIA rate history?
The SONIA rate was introduced in 1997, but the Bank of England (BoE) didn’t take responsibility for the rate until 2016 – they later reformed the rate in 2018 and proposed its use as the alternative to LIBOR.
SONIA is now the preferred benchmark for sterling, following the transition to risk-free rates from LIBOR. To support this transition, the BoE began publishing the SONIA index in August 2020.