Addendum II, November 1999
The framework for the implementation of monetary policy in the Large Value Transfer System environment
Addendum II
In the implementation of monetary policy, the Bank of Canada's influence on the overnight interest rate is effected through its 50-basis-point operating band for this rate. The limits for the band are reinforced through overdraft and deposit facilities for LVTS participants. The upper limit is the Bank Rate, the rate the Bank will charge to participating financial institutions requiring an overdraft loan to cover a deficit to permit settlement of the LVTS at the end of the day. The lower end of the band is the rate at which the Bank remunerates surplus settlement balances of participating institutions at the end of the LVTS day. These arrangements were designed to encourage transactions in the market for overnight funds at rates within the operating band.
Since the introduction of the new framework (see The framework for the implementation of monetary policy in the Large Value Transfer System environment), the Bank has usually set the level of settlement balances in the system at zero. Since mid-April, the average cost of overnight financing has been above the target rate and, under periods of technical tightness, such as those surrounding month-end, when payment volumes and net flow uncertainties are significantly higher, there have been occasions when overnight funding has averaged rates approaching or exceeding the upper limit of the band.
On 24 September 1999 the Bank announced that, on a trial basis, it was prepared to transact a second round of Special Purchase and Resale Agreements (SPRAs) at 2:15 p.m. and target a positive level of settlement balances to reinforce the Bank's objectives for the overnight interest rate on dates surrounding month-end. The results of the trial indicated that these operations were successful in reducing the month-end technical pressures that were exerted on the overnight rate.
The Bank is now prepared to extend the trial to a daily basis in order to reinforce the target rate. In order to reinforce its objectives for the overnight interest rate, the Bank will target a positive level of settlement balances of about $200 million and, on technically tight days, the Bank could target a higher level of balances. In addition, the Bank would be prepared to transact a second round of Special Purchase and Resale Agreements at 2:15 p.m. on days when overnight is trading above the target rate. Conversely, the Bank could initiate Sale and Repurchase Agreements if overnight was trading below the target rate.
The amount of balances targeted will be announced by 4:45 p.m. the previous day on the Bank of Canada's website.
- For further information, contact:
- Tom Hossfeld 613 782-7529
Sheryl King 613 782-7868
Financial Markets Department