The corridor is the band between a central bank's standing lending rate (ceiling) and deposit rate (floor), within which the overnight money-market rate trades. In a corridor system the policy rate sits in the middle; the width and symmetry of the band shape interbank price discovery and reserve scarcity.
How it works
Two standing facilities bound the overnight rate: banks borrow at the marginal lending rate (ceiling) and park excess reserves at the deposit rate (floor). The interbank rate is arbitraged inside this band toward the central bank's target. A symmetric corridor implies the policy rate is mid-band; a floor system collapses the corridor by letting the deposit rate set the operative rate amid abundant reserves.
Why it matters now
As the ECB unwinds QE and balance sheets shrink under QT, the 2024 operational-framework review narrowed the corridor — cutting the spread between the main refinancing operations rate and the deposit facility rate to 15bp — to steer banks back toward demand-driven liquidity provision without reintroducing distortions.
Example
Before the ECB's March 2024 framework review, the spread between the main refinancing operations (MRO) rate and the deposit facility rate was 50bp, with the marginal lending facility 25bp above the MRO. From 18 September 2024 the ECB narrowed the MRO–DFR spread to 15bp, tightening the corridor so that as excess liquidity drains, short-term money-market rates evolve in a more controlled, predictable way around the deposit rate.
Frequently asked
- What is an interest-rate corridor?
- An interest-rate corridor is the band between a central bank's standing lending facility (the ceiling) and its deposit facility (the floor), within which the overnight money-market rate trades. The policy target sits inside this band, and arbitrage between the two facilities keeps the interbank rate from drifting outside it. The ECB, Bank of England and many others operate corridor systems.
- How does a corridor system differ from a floor system?
- A corridor system positions the policy rate inside a band and relies on banks trading around it under moderate reserve scarcity, whereas a floor system
Glossary · floor system
A monetary operating framework in which the central bank supplies reserves abundantly, so the overnight market rate settles at or near the rate paid on reserves rather than being steered by marginal scarcity. Policy is set by adjusting the administered floor rate, not by fine-tuning reserve quantity.
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- Why did the ECB narrow the corridor in 2024?
- The ECB narrowed the corridor in 2024 to ensure short-term money-market rates evolve in an orderly, predictable way as excess liquidity drains during quantitative tightening. From September 2024 it cut the spread between the main refinancing operations rate and the deposit facility rate to 15bp, reducing the incentive distortion that a wider band created and encouraging banks to bid for liquidity again.
- What sets the ceiling and floor of the corridor?
- The ceiling of the corridor is the marginal lending facility rate, at which banks can borrow overnight against collateral; the floor is the deposit facility rate, at which banks park excess reserves. Because no bank borrows in the market above the central bank's lending rate or lends below the deposit rate, the overnight rate stays inside the band.