Target for Overnight Rate

The target for the long rate-the main tool used by the margining company of Canada to conduct fiscal policy. The camber carries out monetary policy by influencing short-term amuse rates. It does this by raising and lowering the target for the overnight rate. The overnight rate is the interest rate at which majorfinancialinstitutions borrow and lend one day funds among themselves the Bank sets a target level for that rate. This target for the overnight rate is often referred to as the Bankskey interest rateorkey policy rate.Changes in the target for the overnight rate influence former(a) interest rates, such as those for consumerloansand mortgages. They can also affect the exchangeof the Canadian dollar. In November 2000, the Bank introduced a system of eight fixed dates separately year on which it announces whether or not it will change the key policy rate. The Target for the Overnight Rate is the main tool used by the Bank of Canada to conduct monetary policy 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 see in the market where they lend each other money 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 proceedings at the end of the day. with the Large Value Transfer System (LVTS), these institutions conduct large 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, while another bank may need money. The trading in funds that allows all institutions to cover their transactions at the end of the day takes place in the overnight market. The interest rate charged on those loans is called the overnight rate. The transmission mechanism of monetary policy The transmission mechani sm is the complex chain of cause and effect that runs from the Bank of Canadas actions to changes in asset prices, aggregate demand, the output gap and, eventually, inflation.Among economists, there is some confer about the nature 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 reduced 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 published by the Bank of Canada (1996) provides a mainstreamviewof the transmission mechanism. The transmission mechanism is outperform understood by tracing through the effects of a hypothetical policy 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 economic recovery occurring both in Canada and in the global economy would create pressures for Canadian inflation to raise over the coming months. In this case, the Banks policy response was to raise its target for the overnight interest rate.