FRM Part II · FRM Exam Part II · Monetary and Fiscal Policy: Safeguarding Stability and Trust
A central bank operating a corridor system sets a deposit facility rate of 2.0% and a marginal lending facility rate of 3.0%. Interbank overnight rates are persistently trading near 3.0% during a period of scarce reserves. What is the most appropriate interpretation?
Overnight rates near the ceiling of the corridor indicate scarce reserves. Banks short of liquidity compete for funds and are willing to pay close to the marginal lending rate, whereas abundant reserves would push rates down toward the deposit facility rate at the floor.
- AReserves are scarce, so banks are bidding up the rate toward the ceiling of the corridorCorrect
- BReserves are abundant, so rates should trade at the floor
- CThe central bank has abolished the lending facility
- DRates at the ceiling indicate the deposit facility rate is above the lending rate
Explanation
In a corridor, the lending facility rate is the ceiling and the deposit rate the floor. Rates near the ceiling signal reserve scarcity, as banks borrow from each other or the central bank at close to the ceiling. Abundant reserves would push rates toward the floor.
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