An interest rate corridor is a policy framework used by many central banks to guide the level of short-term interest rates. It pairs a policy rate with a defined band, typically described as a lower bound (floor) and an upper bound (ceiling). The bank uses liquidity operations, such as standing facilities or open market operations, to keep market rates within that band.
In practice, when the central bank provides additional liquidity, overnight rates tend to move toward the lower bound. When liquidity is withdrawn or markets face funding pressures, rates move toward the upper bound. The corridor communicates the monetary stance and helps stabilize expectations by signaling how policy could shift depending on liquidity conditions.
Not all economies use a formal corridor; some describe a policy rate operating within a range. The corridor concept is common in advanced economies and can interact with other tools like reserve requirements or facilities that banks can access.
If the central bank injects liquidity, overnight rates tend to move toward the corridor's lower bound; if liquidity tightens, rates approach the upper bound.
Central bank policy rate · Open market operations · Deposit facility · Lending facility · Federal funds rate · Monetary policy transmission