The introduction of Interest on Reserves (IOR) transformed how central banks control short-term interest rates, moving monetary implementation from traditional scarcity models to high-liquidity architectures.

Historically, central banks kept system-wide reserves scarce. They controlled short-term interest rates by adjusting the volume of open market operations, moving rates within a tight corridor framed by the discount rate and the deposit floor rate. [1]

[Abundant System Liquidity] ---> Market Rates Drift Down ---> Settles Directly on Interest on Reserve (IOR) Rate

Under a floor system, the central bank floods the banking network with excess reserves through large-scale asset purchase programs. Because banks earn the IOR rate on all reserves parked with the central bank, they have no incentive to lend cash on the interbank market below that rate. The IOR rate effectively functions as a hard floor, allowing the central bank to control short-term market rates regardless of total liquidity volumes.