Banks have a pool of money called ‘zero rated funds’, this is the money that they hold for which they are paying no interest. Lots of current accounts fall under this category, and banks can figure out with time, the block that is there on a regular basis when you remove the marginal volatility in the funds held at any time.
Imagine you own a money shop and you buy in money and sell it too, in the till you know that no matter what happens you always seem to have at least €60 in the till, that would be the equivalent of your zero rated funds (hope that makes sense!).
When banks lend they take these zero rated funds and mix them with money bought on the market to come up with ‘blended rates’. So while some money is costing 0% other money might cost 1.269% (that’s today’s 3 month Euribor ), you then get an average of these and depending on what the ‘blend’ or ‘mix’ is your …