In the implementation of monetary policy, the Bank of Canada sets a target for the overnight interest rate. This rate is defined as the rate at which major participants in the money market borrow and lend one-day funds to each other. This target is reinforced through a combination of a 50-basis-point operating band and the ability of the Bank to conduct Special Purchase and Resale Agreements (SPRAs) or Sale and Repurchase Agreements (SRAs) at the target rate. Recently, various indicators of this overnight interest rate, in particular the rate on overnight general collateral (overnight loans that are secured by government securities), have consistently traded below the Bank's target overnight rate and, in some cases, have traded at levels outside the operating band.

In order to reinforce its objectives for the overnight interest rate, the Bank will, on a temporary basis, implement certain measures. Typically, the Bank neutralizes the cash impact on the system of any market operations. Effective 13 March 2006, the Bank will reduce the target for settlement balances to zero and, on a temporary basis, will no longer commit to neutralizing all of the SRA operations conducted. As a result, the system could be left in a deficit position at the end of the day, requiring some participants in the Large Value Transfer System (LVTS) to take advances at the Bank Rate under the Bank's Standing Liquidity Facility. Adjustments to the amount of SRAs neutralized will be made incrementally and will be reviewed on an ongoing basis.This measure is designed to encourage market participants to trade overnight balances with each other at levels close to the target.

The Bank plans to hold consultations with market participants beginning in April 2006 to further explore this technical issue.

For further background information on the implementation of monetary policy in the LTVS environment, please visit www.bankofcanada.ca/en/review/1998/r984d-ea.html. Information on LVTS settlement balances and on the daily target rate intervention is available at www.bankofcanada.ca/fmd/bankrate.html.