The Bank of Canada today lowered its Bank Rate by ¼ of one per cent to 5 per cent. The associated operating band for overnight interest rates was similarly reduced. The Bank's target for the overnight rate is now 4¾ per cent, the centre of the new operating band.

Today's interest rate reduction was taken in the context of continued improvement in global financial markets and recent evidence that the trend rate of inflation in Canada is close to the lower end of the Bank's target range of 1 to 3 per cent.

This action by the Bank of Canada, along with three similar reductions in September, October, and November, completely reverses the one percentage point increase in short-term interest rates that was needed to bolster investor confidence last August, at a time of nervous and volatile international markets.

This final step in unwinding the interest rate increase of last August is also consistent with keeping the trend rate of inflation inside the target range. Notwithstanding the recent good set of economic indicators, the competitive global environment and the absence of any signs of pressure on domestic production capacity point to continued low inflation in Canada. The Bank's semi-annual Monetary Policy Report, which will be released in mid-May, will present a full analysis of the outlook for inflation.

Background Information

With the introduction on 4 February of the new Large Value Transfer System for making large value payments, the implementation of monetary policy has changed slightly. There is still an operating band of ½ of one percentage point for the overnight rate. The top of the band, the Bank Rate, is the rate charged by the Bank on LVTS overdraft loans to financial institutions. The bottom of the band is the interest rate the Bank of Canada pays on any LVTS balances held overnight by those institutions. The Bank has a target for the overnight rate, which has been set at the centre of the operating band.

With the interest rate reduction announced today, the operating band has been reduced by ¼ of one percentage point to a new range of 4½ to 5 per cent. The Bank's target rate for the overnight rate is 4¾ per cent.

It is through the market for overnight funds that monetary policy exerts a direct effect on financial markets generally.