How does the Bank of Canada implement and conduct monetary policy? - ProProfs Discuss
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How does the Bank of Canada implement and conduct monetary policy?

Asked by Cable, Last updated: Oct 29, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

In canada, monetary policy involves following specific inflation-control targets that establish a range within which to contain annual inflation. currently, the target range is 1% to 3%. the bank uses the target for the overnight rate to implement changes in the direction of monetary policy. the overnight rate is the interest rate set in the overnight market. when the bank changes the target for the overnight rate, other short-term interest rates also tend to change. special purchase and resale agreements (spras) and sale and repurchase agreements (sras) are the two main open market operations used by the bank to conduct monetary policy. spras are used to relieve undesired upward pressure on the overnight rate. if overnight money trades above the target of the operating band, the bank intervenes and offers to lend at the upper limit of the band. this action effectively reinforces the upper limit of the overnight target. sras are used to offset undesired downward pressure on the overnight rate. if overnight money is trading below the target of the operating band, the bank intervenes and offers to borrow at the lower limit of the band. this action effectively reinforces the lower limit of the overnight target. the bank established the large value transfer system (lvts) in 1991 to facilitate its cash management operations. this system allows participating financial institutions to conduct large transactions with each other through an electronic wire system. this system provides an important setting to conduct monetary policy. a drawdown is the transfer of deposits to the bank from the chartered banks, effectively draining the supply of available cash balances from the banking system. this causes a contraction in the availability of loans to consumers and businesses, which places upward pressure on interest rates. a redeposit is the transfer of funds from the bank to the chartered banks, effectively increasing deposits and reserves and the availability of funds in the banking system, which places downward pressure on interest rates.
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