SONIA, the Sterling Overnight Index Average, is the benchmark that connects the Bank of England’s policy decisions to the wholesale money markets. This article explains what it measures, how it is calculated, why it normally sits a little below Bank Rate and what that gap can tell readers.
What is SONIA, and who runs it?
According to the Bank of England, SONIA is “the risk-free rate for sterling markets”, and it is “based on actual transactions”. In plain terms, it reflects the average rate at which banks borrow sterling overnight, without putting up collateral, from other financial institutions and institutional investors. The Bank describes it in a 2025 research note as the UK’s preferred “risk-free rate” benchmark.
The Bank is also the administrator. It is responsible for SONIA’s governance and for publishing it every London business day. Banks send the Bank details of the previous day’s transactions by 7am; the Bank checks the data, calculates the rate and publishes it.
That makes SONIA different from Bank Rate, which is a policy rate chosen by the Monetary Policy Committee. SONIA is an outcome: it records what actually happened in the market, rather than what a committee decided.
How is the SONIA rate calculated?
The Bank’s methodology page says SONIA is the “trimmed mean, rounded to four decimal places” of eligible transaction rates for each London business day. “Trimmed” means the extremes are ignored: the figure is the volume-weighted mean “based on the central 50% of the volume-weighted distribution of rates”.
To be counted, a deposit must meet several conditions set out by the Bank:
| Condition | Requirement |
|---|---|
| Reporting | Reported to the Sterling Money Market daily data collection |
| Security | Unsecured |
| Maturity | One business day |
| Timing | Executed between 00:00 and 18:00 UK time and settled the same day |
| Size | £25 million or more |
Because only the central half of the volume is used, a single unusually high or low deal cannot drag the benchmark around. The Bank publishes the rate at 9am on the following London business day, together with the aggregate volume and the 10th, 25th, 75th and 90th percentile rates.
Why does SONIA sit just below Bank Rate?
The Bank’s research note explains that SONIA “normally trades under Bank Rate” because banks want compensation for the cost of taking these deposits. When reserves are abundant, banks have less need for deposits, which pushes SONIA lower still.
The Bank’s market operations guide adds the other half of the picture: it remunerates reserves balances at Bank Rate. A bank holding reserves can therefore earn Bank Rate without lending to anyone, which discourages it from lending that money overnight in the market at a much lower rate. That is why the overnight market tends to cluster close to Bank Rate rather than drifting far away from it.
The Bank also runs a weekly Short-Term Repo operation, typically on Thursdays, which lends reserves for one week at Bank Rate with no limit per auction, against top-quality collateral. It describes the operation as “intended to be used freely by eligible firms to meet their demand for reserves”. Together, these tools help keep short-term market rates in a narrow corridor around Bank Rate.
What does the gap between SONIA and Bank Rate show?
The size of the gap is a gauge of how plentiful reserves are. The Bank’s July 2025 research note gives the following figures:
- In 2024, SONIA stayed at about 5 basis points below Bank Rate for most of the year.
- At the time of writing in July 2025, it was just over 3 basis points below, which the note called “the narrowest spread to Bank Rate we’ve seen since early in the Covid pandemic”.
- At the 2022 peak of quantitative easing, when sterling reserves were highest, the gap was about 5.5 basis points.
- During the late-2022 market turmoil, it widened to 7.4 basis points.
A basis point is one hundredth of a percentage point, so 5 basis points is 0.05 percentage points. The Bank linked the narrowing to declining reserves and to a move to a demand-driven framework, a development it said it had expected. Readers should treat these as dated observations: the note does not tell us where the gap stands today, and the current SONIA figure should be read directly from the Bank’s published data.
How big is a few basis points in pounds?
The gap looks trivial, but wholesale money is large. This illustrative arithmetic uses a hypothetical £1 million overnight deposit and a hypothetical gap of 3 basis points below a Bank Rate of 3.75%, the level the Bank listed on its interest rates page for the decision of 17 September 2026.
| Rate | Annual rate | Interest for one day on £1 million |
|---|---|---|
| Bank Rate | 3.75% | £102.74 |
| Bank Rate minus 3 basis points | 3.72% | £101.92 |
| Difference | 0.03 percentage points | £0.82 |
Each figure is the annual interest (£37,500 or £37,200) divided by 365 days. Less than a pound a day on £1 million is not much for one deposit, but across the very large balances that banks and institutions place overnight, small gaps add up, and they influence how firms decide where to hold cash.
Why do mortgages, loans and bonds care about an overnight rate?
The Bank’s note calls SONIA a key channel of monetary policy, because it “anchors short-term wholesale interest rates which are passed through to the wider economy”. Those wholesale rates feed into the pricing of loans, mortgages and other financial instruments.
SONIA is also built into financial contracts. The Bank says firms use it for items such as the interest on swap transactions and sterling floating-rate notes, and that it is “used to value around £30 trillion of assets each year”. Sterling overnight index swaps, which reference SONIA, can be used to infer what markets expect for future monetary policy. That is one reason bond and currency traders watch them, and why markets often move before the data arrives.
Compounded SONIA is a related measure. The Bank publishes a SONIA Compounded Index, with a base of 100 on 23 April 2018, which lets users calculate interest accrued over a period by comparing the index at the start and end dates. The Bank began publishing it on 3 August 2020.
What happens if SONIA cannot be calculated properly?
The Bank’s methodology includes safeguards. If a published rate is later found to differ by two or more basis points from the corrected figure, SONIA is republished, but only once a day and by midday. After that deadline, the Bank says “no amendments will be made to the benchmark rate or the SONIA Compounded Index under any circumstances”, which gives contracts a fixed reference point.
There is also a fallback if too little data arrives. If five or more unsecured reporters fail to submit and eligible volume is below 70% of the prior five-day mean, SONIA is set at Bank Rate plus the mean spread over the previous five publication days, excluding the highest and lowest spreads. In other words, the benchmark is designed to keep working during a period of disruption.
How does SONIA fit with gilt yields and Bank Rate?
Bank Rate is a policy decision, SONIA is the overnight market rate that results, and gilt yields are the market prices for lending to the Government over much longer periods. They move together but not identically. The Bank says the rates that high street banks set “depend on more than just the Bank Rate”, including the risk of non-repayment and the term of the loan.
For a longer-term view of how bond prices and yields relate, see why gilt yields matter, even if you never buy a gilt, and for the wider economic effects of Bank Rate decisions, see how Bank of England rate decisions ripple through the economy. On the household side, how mortgage rates affect affordability shows what rate changes mean for monthly payments.
SONIA in perspective
SONIA is rarely a headline figure, yet it is one of the most widely used numbers in sterling finance. It is calculated from real overnight deposits, trimmed to remove extremes, published each London business day and used to value contracts worth trillions of pounds. Its position relative to Bank Rate reflects the supply of reserves and the Bank’s operating framework, rather than a change in policy. The Bank’s next rate decision is listed as 5 November 2026, and any change in Bank Rate would feed through to overnight rates, with the exact gap to SONIA depending on conditions in the money market.
This article is general information, not personalised financial advice or a recommendation. Figures are as published by the sources named on the dates stated; rules and rates change.
Sources: Bank of England
