Since it moved to unlimited fixed-rate funding, the central bank has been content to allow the overnight rate to drift much lower than the policy rate.

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Since the unsecured overnight rate has been the principal policy lever for central banks, this development could, the BIS warns, make it hard for them to rein in inflation in the future.

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In the current money market conditions, where banks have to approach the central bank for borrowing, the overnight lending rate is in fact the key operational policy rate.

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By restricting its liquidity support, the ECB will be able to guide overnight interest rates towards 1% without having to alter its policy rate.

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The central bank's monetary policy targets the federal-funds rate, which banks charge each other on overnight loans.

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