What Is a Central Bank Policy Rate? How the Fed, ECB, BoJ and BoE Set Rates

A central bank policy rate is the short-term rate a central bank sets and defends to anchor overnight lending between banks, which other rates then follow.

The Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England each set one, but they define it differently, defend it with different tools and announce it on their own schedules. This page explains what each bank actually sets, how the rate is held in place, how decisions are announced, how markets price the next move, and how to read a decision when it lands. It is descriptive throughout.

What a policy rate is

A policy rate is an administered price. The central bank does not lend to households or companies directly. It sets the terms on which banks can park money with it or borrow from it overnight, and those terms anchor the overnight rate at which banks and money funds deal with each other. Longer rates, from mortgages to government bonds, then take their cue from where that overnight rate sits today and where markets think it will sit later. That second part is why a bond yield can move before a central bank does (see what the yield curve shows).

Changes are counted in basis points, one hundredth of a percentage point each. A 25 basis point hike raises the rate by a quarter of a point.

How the four major banks implement it

The four banks name different instruments, which matters when reading a headline, a data table or the rules of a market that settles on the decision.

Federal Reserve. The Federal Open Market Committee sets a target range for the federal funds rate, the overnight rate at which banks lend reserve balances to each other, 25 basis points wide. It is a range, not a single number, so sources quote it three ways: the range itself, its upper bound, or its midpoint. The Fed holds the market rate inside the range with administered rates. The interest rate on reserve balances (IORB), set by the Board of Governors, is what the Fed calls an important tool for this. The overnight reverse repurchase (ON RRP) facility gives money funds and other non-bank counterparties a similar alternative, which the Fed describes as the rate below which those counterparties should be unwilling to lend overnight. At the top, standing repo operations help provide a ceiling.

European Central Bank. The Governing Council sets three key rates: the deposit facility rate (DFR), the main refinancing operations (MRO) rate and the marginal lending facility (MLF) rate. In March 2024 it decided to keep steering the policy stance through the DFR, the rate banks earn on overnight deposits with the Eurosystem, and to narrow the MRO to DFR spread from 50 to 15 basis points from 18 September 2024, with the MLF kept 25 basis points above the MRO. When a headline says "the ECB rate", the operative one is the DFR. The ECB said it would review the framework's key parameters in 2026; as of the September 2026 decision, the spreads were still 15 and 25 basis points.

Bank of Japan. The Policy Board sets a guideline for money market operations. Since it ended its negative interest rate policy in March 2024, the Bank has used the short-term interest rate as its primary policy tool, and the guideline reads "encourage the uncollateralized overnight call rate to remain at around" a stated level. The Bank pays that same rate on current account balances through its complementary deposit facility and lends at a higher basic loan rate.

Bank of England. The Monetary Policy Committee sets Bank Rate, a single number. It is the rate the Bank pays on money that banks and other institutions hold with it, and the rate it charges on loans it may make to them.

Meeting cadence and how decisions are announced

All four banks hold eight scheduled rate meetings a year, but they publish different things around them.

Two timing details trip readers up. First, the decision date and the effective date differ: the Fed's target range changes the day after the statement, and the ECB and BoJ name their own effective dates. Second, a projection meeting (the Fed's dot plot, covered in what the Fed dot plot shows) carries more information than a meeting without one, even when the rate does not move.

A worked example: four decisions in September 2026

Between 10 and 18 September 2026 all four banks decided, and the official records show hikes, a hold and split votes.

• ECB, 10 September 2026: raised all three key rates by 25 basis points, taking the deposit facility rate to 2.50 percent, the MRO to 2.65 percent and the MLF to 2.90 percent, with effect from 16 September.
• Federal Reserve, 16 September 2026: raised the target range by 25 basis points to 3.75 to 4.00 percent by a 12 to 0 vote. The implementation note set IORB at 3.90 percent, the ON RRP offering rate at 3.75 percent (the bottom of the range) and the standing repo rate at 4.0 percent (the top), all effective 17 September.
• Bank of England, meeting ending 16 September 2026: held Bank Rate at 3.75 percent by 6 to 3. The three dissenters voted to raise it by 25 basis points.
• Bank of Japan, 18 September 2026: raised the call rate guideline to around 1.25 percent by 7 to 2, effective 24 September. Both dissenters preferred no change.

The Fed example shows the corridor at work. On 21 September 2026 the effective federal funds rate printed 3.88 percent, 52 percent of the way up the new range, per the New York Fed data shown on Kresmion's money markets page. The BoJ example shows why effective dates matter: a table that still reads 1.00 percent for Japan after 18 September and before 24 September is correct, because the new guideline was not yet in force.

How markets price the next move

Markets price the next decision long before it is announced, through three main families of instruments.

Futures. Contracts tied to the overnight rate imply where that rate will average over a future period. CME FedWatch turns 30-Day Fed Funds futures prices into probabilities for each outcome at upcoming FOMC meetings. Futures are also listed on other overnight benchmarks, such as SOFR.

Overnight index swaps (OIS). An OIS exchanges a fixed rate for the compounded overnight rate over the swap's life. Each currency has its reference: SOFR or the effective fed funds rate in dollars, the ECB's euro short-term rate (€STR) in euros, SONIA (administered by the Bank of England) in sterling, and the BoJ's uncollateralized overnight call rate in yen. The fixed rate on a swap that ends just after a meeting shows how much change the market has priced for that meeting.

Prediction markets. Venues list a contract for each outcome of a meeting, paying one dollar if it happens, so the price reads as a rough, crowd-implied probability (see what a prediction market is). Polymarket's rules resolve on the change in the bank's own instrument: the upper bound of the Fed's target range, the ECB deposit facility rate, Bank Rate for the BoE, and for the BoJ (in its September 2026 market) the uncollateralized overnight call rate. The wording can change from one market to the next, so the rules on each market are the ones that count. How prediction markets price the Fed covers reading the whole outcome set and the volume behind it.

Reading a rate-decision market comes down to a few checks. Each outcome of a meeting (no change, a 25 basis point move, a larger move) is a separate contract, so the outcomes are read as a set, and their prices should add up to roughly 100 percent. The best bid and ask show how wide the spread is; a wide spread makes the headline price a looser reading. The price history shows how the pricing moved as data arrived, and the timestamp matters, because the figure is only a reading at that moment. The resolution rules name the rate and the source the contract settles on.

None of these is a forecast. Each is a price that moves with fresh data, and a gap between them is itself worth noting.

How to read a decision

Four things carry the information, roughly in this order.

1. The action against what was priced. A hike, cut or hold that markets had fully priced moves little. The surprise, the gap between the decision and the pricing the day before, is what markets react to. 2. The vote. A unanimous decision and a 6 to 3 split can deliver the same rate but read very differently. The Fed, BoJ and BoE all publish their votes with the decision; at the BoE and BoJ, dissenters are named with the move they preferred. 3. Statement changes. Compare the new statement with the previous one line by line. A dropped phrase or a new sentence about inflation is often the real news. 4. The operational details. For the Fed, the implementation note shows whether IORB and ON RRP moved with the range. For the ECB, check that the three rates moved together.

Kresmion's central banks tracker lists the policy rate of every central bank it covers, each with the rate's name as published, its observation date, the size and direction of the last change, and the source of the number, with links to the bank's own statistics, calendar and press pages where available. Many rates come from the BIS policy rate series, which publishes with a lag of days to weeks, so the observation date is part of the reading. The odds pages carry Polymarket rate-decision markets for the Fed, ECB, BoJ and BoE, each with the venue's resolution rules and, while a market is open, its price history and order book spread.

Key takeaways

Frequently asked questions

Is the Fed's policy rate a single number?

No. The FOMC sets a target range 25 basis points wide for the federal funds rate. News and markets quote either the range, its upper bound or its midpoint, and Polymarket's Fed markets settle on the change in the upper bound. The market rate itself, the effective federal funds rate, prints daily inside the range.

Which ECB rate is the policy rate?

The deposit facility rate. The ECB sets three key rates, but in March 2024 it confirmed it steers the policy stance through the deposit facility rate. The main refinancing rate sits 15 basis points above it and the marginal lending rate 25 basis points above that.

What is the Bank of Japan's policy rate?

It is the level at which the Bank encourages the uncollateralized overnight call rate to remain, stated in its guideline for money market operations. The Bank has used this short-term rate as its primary policy tool since it ended negative interest rates in March 2024.

Does market pricing predict the decision?

No. Futures, swaps and prediction markets show what traders are pricing at a moment, and that pricing changes as data arrives. A heavily priced outcome still sometimes fails to happen, and the gap between pricing and the decision is exactly what moves markets on the day.

This page is information, not investment advice.

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Source: Federal Reserve (FOMC statement and implementation note of 16 September 2026, open market operations record, FOMC calendar, IORB and ON RRP pages); ECB (key interest rates, 13 March 2024 operational framework decision, 10 September 2026 decision, meeting calendar, accounts); Bank of Japan (19 March 2024 and 18 September 2026 statements, MPM schedule, outline of monetary policy); Bank of England (Bank Rate page, MPC membership, September 2026 Monetary Policy Summary and minutes, SONIA); CME Group FedWatch; Polymarket market rules via Kresmion odds data, fetched 22 September 2026; New York Fed rates via Kresmion money markets, observed 21 September 2026.

Kresmion Research.