Corridors and Floors: How Policy Rates Actually Steer Overnight Money
Posted: Wed Oct 28, 2026 1:28 am
A policy rate announcement is only a target. The central bank must then steer overnight market rates toward it using an operating framework, and the design differs between jurisdictions.
In a corridor system, a lending facility sets a ceiling and a deposit facility sets a floor, with the target in between. Market rates wander inside the band depending on how scarce reserves are. In a floor system, abundant reserves keep market rates pinned near the deposit rate, which becomes the main lever. Some banks pair an administered rate on reserves with an overnight reverse repo facility to hold a floor under money markets.
Gaps between the policy rate and the market rate carry information. Overnight rates drifting toward the top of the band suggest reserves are becoming scarce, whereas rates sagging toward the floor suggest excess liquidity. Such moves can affect short-dated FX forwards and the cost of funding positions, even when the headline rate has not changed.
For scalpers, the relevance is mostly around month-end and quarter-end, when funding pressure can stretch spreads between secured and unsecured rates and influence the short-dated swap points feeding into rollover costs.
In a corridor system, a lending facility sets a ceiling and a deposit facility sets a floor, with the target in between. Market rates wander inside the band depending on how scarce reserves are. In a floor system, abundant reserves keep market rates pinned near the deposit rate, which becomes the main lever. Some banks pair an administered rate on reserves with an overnight reverse repo facility to hold a floor under money markets.
Gaps between the policy rate and the market rate carry information. Overnight rates drifting toward the top of the band suggest reserves are becoming scarce, whereas rates sagging toward the floor suggest excess liquidity. Such moves can affect short-dated FX forwards and the cost of funding positions, even when the headline rate has not changed.
For scalpers, the relevance is mostly around month-end and quarter-end, when funding pressure can stretch spreads between secured and unsecured rates and influence the short-dated swap points feeding into rollover costs.