Addendum I, September 1999

The framework for the implementation of monetary policy in the Large Value Transfer System environment

Addendum I

In the implementation of monetary policy, the Bank of Canada's influence on the overnight interest rate is effected through its 50-basis-point operating band for this rate. The limits for the band are reinforced through overdraft and deposit facilities for LVTS participants. The upper limit is the Bank Rate, the rate the Bank will charge to participating financial institutions requiring an overdraft loan to cover a deficit to permit settlement of the LVTS at the end of the day. The lower end of the band is the rate at which the Bank remunerates surplus settlement balances of participating institutions at the end of the LVTS day. These arrangements were designed to encourage transactions in the market for overnight funds at rates within the operating band.

Since the introduction of the new framework (see The framework for the implementation of monetary policy in the Large Value Transfer System environment), the Bank has set the level of settlement balances in the system at zero. Under typical conditions, this has been sufficient to permit institutions to trade with each other to eliminate deficits or surpluses and to maintain the overnight rate within the operating band. However, under periods of technical tightness, such as those surrounding month-end, when payment volumes and net flow uncertainties are significantly higher, there have been occasions when overnight funding has averaged rates approaching or exceeding the upper limit of the band.

In order to reinforce its objectives for the overnight interest rate, on a trial basis, the Bank is prepared to transact a second round of Special Purchase and Resale Agreements at 2:15 p.m. and target a positive level of settlement balances on the dates surrounding month-end. The amount of these positive balances would be announced by 4:45 p.m. the previous day on the Bank of Canada's website.

For further information, contact:

Donna Howard 613 782-8474
Lorna Thomas 613 782-8676
Financial Markets Department