First, the various segments of the financial markets are integrated well through smooth inter-market arbitrage, and thus we have relatively stable inter-market relationships of interest rates called yield curves. Second, market participants have confidence in the markets and thus counterparty risks are contained well.
Assuming these well-functioning financial markets, the central bank sets the policy rate at a level consistent with its stated goal of price stability (and possibly other goals which vary with countries). The bank manages its liquidity provision to ensure that short-term market interest rates are in line with the policy rate.