Canada's Approach to Monetary Policy

By Little, Jane Sneddon | New England Economic Review, Spring 2002 | Go to article overview
Save to active project

Canada's Approach to Monetary Policy


Little, Jane Sneddon, New England Economic Review


The ultimate goal of Canadian monetary policy is maintaining a low, stable rate of inflation in order to foster efficient economic performance and a rising standard of living for Canadians. More specifically, the Bank of Canada (1) aims to keep inflation inside a target range of 1 to 3 percent. This range, established jointly with the federal government, was first announced in 1991 and has been extended through the end of 2006. Over the medium term, the target applies to total CPI. The Bank also uses a core CPI measure as a guide to future inflation developments over the shorter term. The Bank of Canada's operational target is the overnight rate, which is set at the midpoint of a 50 basis point operating band. (2)

Central Bank Assets

At the end of 2000 the Bank of Canada had Can$40 billion in assets, the bulk (83 percent) of which were investments in securities issued or guaranteed by the Government of Canada, which are generally held to maturity. Other investments (4 percent) were largely composed of foreign currency investments acquired in short-term swap arrangements with the government's Exchange Fund Account. In addition, the Bank's assets included deposits in foreign currencies (2 percent), advances to members of the Canadian Payment Association (2 percent), and "other assets" (9 percent), the bulk of which were Government of Canada securities purchased under resale agreements.

Standing Facilities

The advent of the Large Value Transfer System (LVTS), the Canadian Payments Association's new electronic payments system, which became fully operational in February 1999, resulted in some changes in the Bank's operating procedures. (3) The Bank sets a target for the overnight interest rate at the midpoint of its 50 basis point operating band. LVTS participants needing an overdraft (fully collateralized, as discussed below) at the day's final settlement are charged the Bank rate, the upper limit of the operating band. The Bank pays an interest rate equal to the lower limit of the band on positive balances remaining after the LVTS settlement. The Bank typically sets the level of settlement balances in the financial system at a slight positive value. (4) Thus, LVTS participants with deficits know that potential counterparties with surplus funds exist. After the close of client business at 6 p.m., participants have one-half hour to trade with each other to reduce their LVTS positions through transactions made at market rates. (5)

Open Market Operations

The Bank announces any change in the target rate and operating band at 9 a.m. If necessary, the Bank will intervene in the open market at about 11:45 a.m. if the overnight rate is straying from its target in the midpoint of the band. It uses Special Purchase and Resale Agreements (SPRAs) with a term of one business day if the overnight rate is too high and Sale and Repurchase Agreements (SRAs) if the rate is too low. (6) These repo and reverse repo-type transactions are based on Government of Canada securities, which are marked to market and subject to haircuts that rise with the maturity of the security to as much as 2.5 percent. The counterparties in these operations are the primary dealers, each of which has a predetermined limit for both types of transactions. The primary dealers are a group of government securities distributors who maintain a minimum share of the activity in the market for Canadian government debt. (Prior to the start of the LVTS, SPRAs and SRAs were used to reinforce the upper and lower limits of the band.)

Auctions of Government Deposits

To keep the settlement balances in the financial system slightly positive, the Bank neutralizes the impact of any public sector flows between the Bank of Canada and the financial system. It does so by transferring government deposits to and from the government's account at the Bank of Canada. The transfer occurs through two daily auctions--at 9:15 a.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Canada's Approach to Monetary Policy
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?