13. The Bank Rate (Ch7)

Principles of Macroeconomics (with Xtra!)

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T he Bank Rate is the rate of interest that the Bank of Canada charges on short-term loans to financial institutions. It is the main “lever” that the Bank uses to conduct monetary policy . The Bank Rate is adjusted from time to time to help ensure a low- inflation environment favourable for long- lasting growth and job creation. The Bank Rate as a trend-setter The Bank Rate establishes a range—called the operating band—in which the overnight lending rate can move up or down. The overnight lending rate is the rate at which major financial institutions borrow from and lend one-day funds to each other. The Bank Rate defines the upper limit of the operating band which is half a percentage point wide. For example, if the Bank Rate is set at 4.5 per cent, then the operating band will be from 4.0 to 4.5 per cent. The upper and lower limits of the operating band are the rates at which the Bank of Canada will, respectively, loan one-day funds to financial institutions or pay interest on one- day funds deposited by financial institutions.
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