How does the upper and lower band help to keep the overnightrate of - ProProfs Discuss
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How does the upper and lower band help to keep the overnightrate of interest where the bank of Canada wants it?

Asked by Harrington, Last updated: Nov 13, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

When the rate is between the band and direct clearers are required to reduce their net balances to zero at the end of the night, the bank of Canada stands ready to lend at the upper operating band. This represents a higher interest rate than the current overnight rate. The bank of Canada stands ready to borrow at the lower operating band. This represents a lower interest rate than the current overnight rate. This is the most common situation that arises. The text talks about the less common overnight rate trading beyond the bands. In such a case, the bank of Canada lending at the upper band represents an interest rate that is lower than the current overnight rate. This would serve to bring direct clearers back to the operating band instead of trading above the band.

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