Target for Overnight Rate

The target for the all-night direct-the main tool used by the marge of Canada to gestate fiscal indemnity. The Bank carries out monetary policy by influencing short-term delight rates. It does this by raising and lowering the target for the nightlong rate. The overnight rate is the re take rate at which majorfinancialinstitutions borrow and wreak one day capital among themselves the Bank sets a target take aim for that rate. This target for the overnight rate is often referred to as the Bankskey reside rateorkey policy rate.Changes in the target for the overnight rate influence other interest rates, such as those for consumerloansand mortgages. They corporation also affect the exchangeof the Canadian dollar. In November 2000, the Bank introduced a system of eight fixed dates each(prenominal) year on which it announces whether or not it will change the key policy rate. The Target for the all-night Rate is the main tool used by the Bank of Canada to conduct monetary polic y for this reason, it is also known as the policy interest rate.It tells major financial institutions the average interest rate that the Bank wants to suffer in the market where they l terminal each other bullion overnight. When the Bank changes the Target for the Overnight Rate, this change affects other interest rates in the economy. Canadas major financial institutions routinely borrow and lend money overnight among themselves, in order to cover their transactions at the end of the day. Through the Large Value Transfer System (LVTS), these institutions conduct handsome transactions with each other electronically.At the end of the day, they need to settle with each other. One bank may have funds left over, tour another bank may need money. The trading in funds that allows all institutions to cover their transactions at the end of the day takes settle in the overnight market. The interest rate charged on those loans is called the overnight rate. The transmission mechanics of monetary policy The transmission mechanism is the multifactorial chain of cause and effect that runs from the Bank of Canadas actions to changes in asset prices, center demand, the output gap and, eventually, inflation.Among economists, there is some debate about the temperament of the transmission mechanism. Engert and Selody (1998), for example, emphasize the important distinction between the passive-money and active-money views of the transmission mechanism and argue that the possibility of making policy errors can be decreased by paying attention to both views. Even among those who agree on the broad nature of the mechanism, there is recognition of considerable uncertainty regarding the time and quantitative importance of specific linkages.A collection of speeches and research papers produce by the Bank of Canada (1996) provides a mainstreamviewof the transmission mechanism. The transmission mechanism is best understood by tracing through the effects of a hypothetical poli cy decision. For example, consider a situation akin to that in the autumn of 2004, when the Bank had good reason to expect that the solid scotch recovery occurring both in Canada and in the global economy would create pressures for Canadian inflation to rise over the coming months. In this case, the Banks policy response was to raise its target for the overnight interest rate.