A short-term interest rate, often an overnight rate, that banks charge one another for funds borrowed over short periods of time. Policy rate is affected by the monetary policy deployed by a central bank: when it adds money to the banking system by buying or borrowing securities-through open market operations (OMOs) – that is, it applies a loosening policy, the policy rate declines. In the opposite scenario, the rate increases.

Monetary policy usually focuses on the interest rates that would be targeted by a central bank, rather than on a certain level of the money supply (although the desired interest rates may need to be achieved through adjustments to the money supply).

This rate is also known as monetary policy rate.