SONIA Interest Rate: Calculation, Uses, and LIBOR Transition

The SONIA interest rate, short for the Sterling Overnight Index Average, is the Bank of England’s benchmark for the cost of borrowing sterling overnight on an unsecured basis between banks and other wholesale market participants. As of late March 2026, it sits at roughly 3.73%, a few basis points below Bank Rate. SONIA replaced GBP LIBOR as the primary reference rate for sterling financial contracts and now underpins more than £90 trillion of new transactions each year, from interest rate swaps to some residential mortgages.¹

What SONIA Measures

SONIA tracks the actual interest rate paid on overnight, unsecured sterling deposits in the wholesale market. Each day’s figure comes from real transactions in which one institution lends cash to another for a single business day with no collateral attached. Because the loans are extremely short and are made between creditworthy institutions, SONIA is treated as a near risk-free rate: it strips out the term premium and bank credit-risk component that made LIBOR unreliable.²

SONIA usually sits slightly below Bank Rate. The gap has historically ranged from about 3 to 7 basis points depending on how much reserve cash is sloshing around the banking system. When reserves are abundant, banks compete less aggressively for overnight deposits and SONIA drifts further below Bank Rate. In tighter conditions, the two rates converge.³

How the Daily Rate Is Calculated

Every London business day, the Bank of England collects data on eligible overnight sterling deposit transactions through its Sterling Money Market daily data collection. A transaction only counts if it meets all of these conditions:

Unsecured, with no collateral backing the deposit.
One business day maturity, repaid the next business day.
Executed and settled between midnight and 6:00 PM London time on the same day.
At least £25 million in size, which excludes small or unusual trades.

Those criteria keep the sample focused on genuine wholesale activity.²

Once the Bank has the day’s eligible trades, it applies a trimmed mean. Transactions are sorted by interest rate and weighted by volume. The highest 25% and lowest 25% of the volume-weighted distribution are then removed, and the published SONIA is the volume-weighted mean of the central 50%, rounded to four decimal places. Trimming the extremes stops a handful of outlier trades from skewing the figure.²

Every published rate is anchored to money that actually changed hands the day before. That is the structural improvement over LIBOR, which depended on panel banks submitting estimates of what it might cost them to borrow, and so was open to manipulation.

When and Where SONIA Is Published

The Bank of England publishes the previous business day’s SONIA rate at 9:00 AM London time on the next London business day. The figure is available free of charge on the Bank’s Interactive Statistical Database by 10:00 AM and is also distributed through Bloomberg (ticker SONIO/N Index) and Refinitiv for market participants who need real-time feeds.²

If an error is spotted after the 9:00 AM release, the Bank will only republish a corrected rate when the revised figure differs from the original by two or more basis points, and any correction has to go out by midday that same day. The Bank republishes once per day at most. After the midday deadline, the published rate stands even if a later discrepancy comes to light.²

Since August 2020, the Bank has also published a SONIA Compounded Index each day. It is a running cumulative measure that lets a contract administrator work out compounded interest across any period by dividing the index value at the end of the period by the value at the start, instead of compounding daily rates by hand.¹

What SONIA Is Used For

SONIA sits at the centre of sterling fixed-income and derivatives markets. Its main applications include:

Interest rate swaps. In a SONIA swap, one party pays a fixed rate and receives compounded SONIA (or the reverse). Outstanding cleared SONIA swaps exceed £10 trillion in notional value.¹
Floating rate notes, where the bond’s coupon resets periodically against SONIA rather than paying a fixed rate.¹
Commercial lending, including many syndicated and bilateral facilities now priced at compounded SONIA plus a credit margin.
Tracker mortgages, where some residential lenders tie variable-rate products to SONIA so that monthly payments move as the overnight rate moves.

A corporate treasurer hedging a loan with a SONIA swap knows both legs of the arrangement reference exactly the same benchmark, which keeps pricing consistent across the market.

Compounding SONIA for Longer-Term Contracts

SONIA is a daily rate, but most loans and bonds have interest periods measured in months. Bridging the gap is done by compounding in arrears: stacking each day’s observed SONIA rate on top of the previous day’s across the period so the final charge reflects actual overnight costs rather than a forward estimate.

There is a practical catch. If you compound right up to the last day of the interest period, the final rate only publishes at 9:00 AM the morning after, leaving almost no time to process a payment. Contracts solve this with a lookback, typically five business days. On each day of the interest period the calculation uses the SONIA rate from five business days earlier, so the total interest amount is known five business days before the payment date.

Two variations exist. In a lookback without observation shift, each day’s rate is pulled from five business days earlier but the weighting (the number of calendar days that rate applies to) still comes from the interest period itself; this is the simpler method and the one most commonly used in UK loan markets. In a lookback with observation shift, both the rate and the weighting are shifted back five business days, which changes how bank holidays are handled. The difference is tiny in practice: a worked example from the Bank of England’s RFR Working Group showed less than £1 on a £100 million principal over a typical interest period.⁴

When a Forward-Looking Rate Is Needed

Compounding in arrears works for most products, but some borrowers genuinely need to know the interest cost at the start of a period. Trade finance facilities that discount receivables, Islamic finance structures that require a pre-determined return, and small-business borrowers who need simple cash-flow planning all fall into this category.

For those situations, the FTSE Term SONIA benchmark provides a forward-looking rate. Administered by the London Stock Exchange Group, it is published at 11:50 AM London time each business day for one-, three-, six- and twelve-month tenors, derived from prices in the overnight index swap market using a waterfall methodology that starts with executable dealer-to-dealer quotes.⁵ UK regulators have said Term SONIA should not become the new default; if it were used as widely as LIBOR was, the same structural vulnerabilities could re-emerge, because Term SONIA ultimately depends on the liquidity of the underlying swap market. Compounded SONIA in arrears is expected to remain the standard for derivatives, bonds, and most lending.⁶

SONIA and the LIBOR Transition

SONIA was selected by the Working Group on Sterling Risk-Free Reference Rates as the preferred replacement for GBP LIBOR.¹ New contracts reference SONIA directly, but legacy contracts originally written on LIBOR also needed a mechanism to transition.

For derivatives, that mechanism is the ISDA 2020 IBOR Fallbacks Protocol. By adhering to the Protocol, counterparties agree that if an “Index Cessation Event” occurs, the contract automatically switches from LIBOR to compounded daily SONIA plus a fixed spread adjustment. The Protocol took effect on January 25, 2021 and remains open to new adherents with no cut-off date.⁷

The spread adjustment exists because the two rates are structurally different. LIBOR included a term premium and a bank credit-risk component that SONIA, as an overnight near risk-free rate, does not. Swapping one for the other without an adjustment would change the economics of every legacy contract. ISDA calculated the spread as the median difference between LIBOR and compounded SONIA for each tenor over a five-year lookback window, and the spreads were fixed as of March 5, 2021.⁸

How SONIA Differs from SOFR

Different jurisdictions chose different overnight rates to replace LIBOR. In the United States, that rate is the Secured Overnight Financing Rate, or SOFR. The key difference is the word “secured.” SOFR measures the cost of overnight borrowing collateralised by U.S. Treasury securities (the repo market), while SONIA measures unsecured borrowing with no collateral.⁹

That has practical consequences. SOFR tends to be slightly lower than an equivalent unsecured rate and can spike at quarter-end and year-end when demand for Treasury collateral surges. SONIA, being unsecured, does not experience those repo-driven spikes but does carry a sliver of credit risk, though overnight unsecured lending between major banks has an extremely low default rate. Both rates share the same fundamental advantage over LIBOR: they are built from actual transactions rather than bank estimates, which makes them far harder to manipulate.

1
Bank of England. SONIA Interest Rate Benchmark
2
Bank of England. SONIA Key Features and Policies
3
Bank of England. Straight and Narrow: Recent Changes in SONIA and Why We Care
4
Bank of England. UK Loan Conventions Supporting Slides
5
LSEG. FTSE Term SONIA Methodology
6
Bank of England. Use Cases of Benchmark Rates: Compounded in Arrears, Term Rate and Further Alternatives
7
International Swaps and Derivatives Association (ISDA). ISDA 2020 IBOR Fallbacks Protocol
8
International Swaps and Derivatives Association (ISDA). IBOR Fallback Rate Adjustments – Frequently Asked Questions
9
Federal Reserve Bank of New York. A User’s Guide to SOFR