Interest on excess reserves

(IOER).

The practice of central banks of paying interest on deposits from depository institutions (notably commercial banks) that are in excess of amount of deposits that the bank may be required to hold (together with cash) in view of its liabilities or for other regulatory reasons.

Payment of interest on excess balances means that banks are less likely to lend central bank deposits among themselves (in "interbank" or (US) "federal funds" transactions at rates below the rate paid on excess reserves. Varying the interest rate on excess reserves, then, allows the central bank, then, to influence short-term rates in the economy generally.