11.2 Monetary Policy Targets
One of the most important functions of the Bank of Canada is to conduct monetary policy.
To maintain the overnight interest rate within the target band, the Bank of Canada must intervene in the market to cover any shortages or remove any surpluses of funds that would push rates beyond its target. The Bank has two tools it uses for this purpose.
One tool is the special purchase and resale agreement (SPRA). The second tool used is called sale and repurchase agreement (SRA). Using these tools, the BoC can directly influence the overnight interest rate and money supply.
Overnight Interest Rate Target
The target for the overnight rate, also known as the key policy interest rate, is the interest rate that the Bank expects to be used in financial markets for one-day (or “overnight”) loans between financial institutions. This key rate serves as the benchmark that banks and other financial institutions use to set interest rates for consumer loans, mortgages, and other forms of lending.
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Attribution
Adapted from 10.3 in Principles of Macroeconomics by D. Curtis and I. Irvine licensed under a CC BY-NC-SA 4.0 International Licence, except where otherwise noted.
The interest rate that large financial institutions receive or pay on loans from one day until the next.
