Markets · 6 pages · 12 min

How central banks set a policy rate

A central bank steers a short-term wholesale rate by setting its own rates and supplying reserves.

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From the opening

A central bank sets a policy rate by announcing a target for a very short-term wholesale rate, often the rate at which banks lend reserves to each other overnight. It then uses its own administered rates and the supply of reserve balances to pull the market rate toward that target. The opening covers the target is an overnight rate, interest on reserves can floor it, and asset trades change reserve supply.

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Inside

The target is an overnight rate
Interest on reserves can floor it
Asset trades change reserve supply
Other rates are not dictated
Where the idea stops applying
A distinction worth keeping

Sources

Central bank policy rate
Interest on reserve balances

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How central banks set a policy rate

From the opening

Inside

Sources

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