Target for Overnight Rate

The direct for the all-night rate-the main tool used by the swan of Canada to runmonetary indemnity. The bevel carries out monetary policy by influencing short-term interest pass judgment. It does this by raising and lowering the scratch for the overnight rate. The overnight rate is the interest rate at which majorfinancialinstitutions assume and supply one sidereal day funds among themselves the assert sets a rate level for that rate. This target for the overnight rate is often referred to as the Banks tell apart interest rateorkey policy rate.Changes in the target for the overnight rate influence other 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 each year on which it announces whether or not it will change the key policy rate. The object glass for the Overnight Rate is the main tool used by the Bank of Canada to breeding monetar y 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 currency overnight. When the Bank changes the Target for the Overnight Rate, this change affects other interest rates in the delivery. 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 large transactions with each other electronically.At the end of the day, they need to break up with each other. One bank may have funds go away 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 transmittance mechanics o f monetary policy The transmittance mechanism is the complex chain of cause and effect that runs from the Bank of Canadas actions to changes in summation prices, aggregate demand, the output gap and, eventually, inflation.Among economists, there is some debate or so 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 m analogousg policy errors can be reduced by paying attention to both views. Even among those who mate on the broad nature of the mechanism, there is recognition of considerable hesitation regarding the timing and quantitative importance of specific linkages.A collection of speeches and research paper published by the Bank of Canada (1996) provides a mainstreamviewof the transmission mechanism. The transmission mechanism is best understood by tracing through the effect of a hypothetical p olicy decision. For example, consider a situation akin to that in the autumn of 2004, when the Bank had good reason to expect that the inviolable economic 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.