The
Bank Rate -- which is the rate of interest that the
Bank of Canada charges on one-day loans to financial
institutions -- is part of a range called the
Operating Band for the overnight rate. The overnight
rate is the rate at which major financial
institutions borrow and lend one-day funds among
themselves.
The
Bank Rate is always at the top end of the operating
band, which is half a percentage point wide. For
example, if the operating band is 4.25 to 4.75 per
cent, the Bank rate would be 4.75 per cent. The
Overnight Rate Target is always at the middle of the
band.
The
upper and lower limits of the operating band are the
rates at which the Bank of Canada will,
respectively, loan one-day funds to financial
institutions that operate in theLarge
Value Transfer System
(LVTS), or pay interest on one-day funds
deposited at the Bank by financial institutions.
For example, if a
commercial bank that is a member of the LVTS needs
funds to cover its transactions during the day, it
can borrow from the Bank of Canada at the Bank Rate,
or it can borrow from another financial institution
that has excess funds.
Over the years, the Bank
of Canada has refined the way it conducts monetary
policy. Under previous systems, the Bank Rate was
defined differently and played a more prominent role
in monetary policy.
From
March 1980 to February 1996, for example, the Bank
Rate was defined as the average yield at the Bank's
weekly auction of 3-month treasury bills, plus one
quarter of a percentage point. This rate changed
with every auction. Sometimes, these weekly changes
in the Bank Rate were mistakenly thought to be
shifts in the Bank's policy.
But
under the Bank's current system, policy shifts are
clearly signaled by changes in the Overnight Rate
Target. The Bank Rate and Operating Band are
correspondingly adjusted at the same time. The Bank
of Canada has set a calendar of eight fixed days
every year when it announces whether or not these
rates will be changed.
