A policy interest rate is the rate that a central bank uses as its main instrument of monetary policy. It is announced after each meeting of the bank's decision-making committee and is raised to restrain inflation or lowered to support activity. Depending on the country, it is either a rate the central bank itself pays or charges, such as the interest on reserves or the rate on its regular lending operations, or a target for a market overnight rate that it steers through its operations.
Well-known examples are the federal funds rate target range in the United States, Bank Rate in the United Kingdom and the deposit facility rate in the euro area. Many central banks set a corridor around it using a standing lending facility and a standing deposit facility. Changes pass through to market and bank rates by the monetary transmission mechanism.