Canada

Canada[CAD]

Institutional framework

The Bank of Canada Act 1 establishes that the principal role of the Bank of Canada (BoC) is "to promote the economic and financial welfare of Canada". To achieve this mandate, the BoC has four main areas of responsibility, which are: Monetary Policy, Financial System, Currency and Funds Management.

The objective of monetary policy in Canada is to preserve the value of money by keeping inflation low, stable and predictable. The main tools in Canada's monetary policy framework are the inflation-control target and the flexible exchange rate. In 2016, the Government of Canada and the BoC renewed Canada's inflation-control target for a further five-year period, ending December 31, 2021 and will aim to keep inflation 2 at 2 per cent, with a control range of 1 to 3 per cent. The BoC's Governing Council is responsible for the day-to-day conduct of monetary policy.

The inflation-control target guides the BoC's decisions on the appropriate setting for the policy interest rate, which is aimed at maintaining a stable price environment over the medium term. The BoC announces its policy rate settings on 8 fixed announcement dates 3 throughout the year.

Canada's flexible exchange rate, or floating dollar, permits the BoC to pursue an independent monetary policy that is best suited to Canada's economic circumstances and is focused on achieving the inflation target.

Key features of the monetary policy implementation framework 4

The Bank of Canada implements monetary policy by influencing short-term interest rates through one of two alternative frameworks – an interest rate corridor system or a floor system – depending on how the BoC manages its balance sheet and supplies liquidity to the payment system. 5 It does this by setting a target for the overnight rate (often referred to as the policy rate), which determines the rates at which banks and other financial system participants borrow and lend at the shortest end of the yield curve. Interest rates on standing deposit and lending facilities, which are set according to the relevant operational framework, and open market operations help reinforce the BoC's target.

For the overnight target rate, the Bank of Canada targets the rate on collateralised, market-based overnight transactions. The BoC uses the general collateral (GC) repo rate as its guide to conditions in the overnight market. It is the primary, actively traded and most transparent collateralised overnight rate in Canada and allows the BoC to determine whether open market operations are required to reinforce the target for the overnight rate. The level of the overnight interest rate and expectations about its future path both influence other longer-term interest rates, as well as a broader range of asset prices.

Key features of the BoC's framework that function together to help achieve the targeted policy rate are as follows:

  • Target for the overnight rate: the key policy interest rate that the BoC sets to meet its monetary policy objectives, also serves as a signal to major participants in the money markets as to what rate the BoC is aiming for participants to lend/borrow money in the overnight market.
  • Interest rates associated with the Bank's standing deposit/liquidity facilities: these rates steer market participants to lend/borrow money in the overnight market near the target rate.
  • Settlement Balances or Cash Setting: the amount of excess or deficit deposits supplied to participants in the Lynx 6 payment system on a daily basis.
  • Open market operations: open market Overnight Repo (OR) / Overnight Reverse Repo (ORR) transactions that are conducted to reinforce the target overnight rate.

The Bank of Canada's implementation of monetary policy is closely linked to the level of liquidity in Canada's main payment system (Lynx) 6 – through which almost all payments (measured by value) flow – and the management of the BoC's balance sheet. Under normal course, when the BoC's acquisition of financial assets is driven by government deposits 7 and the issuance of bank notes, and the supply of settlement balances is limited (close to zero), the BoC operates under an interest rate corridor system. In exceptional circumstances, when extraordinary lending and asset purchases are conducted for policy purposes and settlement balances grow to fund these operations, it is generally necessary to implement monetary policy using a floor system. 5

In an interest rate corridor system, the target for the overnight rate is set at the mid-point of a 50 basis point interest rate corridor, or operating, band which is supported by standing deposit and lending facilities available to direct members in Lynx. The BoC lends money against collateral at the top of the band (the "Bank Rate" at target plus 25 basis points) or takes deposits at the bottom of the band (the "Deposit Rate" at target minus 25 basis points). This encourages transactions for overnight funds in the market at rates within the band. If no excess balances are left in the system, then the aggregate position of all Lynx members in their settlement accounts with the BoC at the end of the day will be zero. As such, members with a deficit/positive balance are aware that an offsetting positive/deficit position exists with one or more other members. Positive balances are remunerated by the BoC at the Deposit Rate, while deficit positions must be covered by taking an overnight collateralised advance from the BoC at the Bank Rate.

In a floor system, the target for the overnight rate is set equal to the Deposit Rate, and the Bank Rate is set at the target rate plus 25 bps. The Bank creates at least enough settlement balances to drive the overnight rate down to equal the Deposit Rate.

Another key feature of the Bank of Canada's framework is the ability to adjust the level of settlement balances in the system to support trading at the target rate and address frictions in the payments system. However, unexpected payment frictions in the market can sometimes cause the overnight rate to move away from the BoC's target rate during the day. In cases where the BoC judges that the deviation is a result of generalised pressure on liquidity, it can offset this pressure by adding or withdrawing liquidity with open market operations. Changing the level of settlement balances to reinforce the target rate has been an effective policy tool for implementing monetary policy. For example, in past years the targeted level of settlement balances has been adjusted in anticipation of seasonal or temporary upward pressure on the overnight rate around quarter-ends or year-ends. Increasing settlement balances provides a strong incentive for market players to lend their cash earlier in the day, thus putting downward pressure on the overnight rate.

In exceptional circumstances, such as when the BoC seeks to provide additional monetary stimulus at very low interest rates (i.e., the effective lower bound), the BoC can create settlement balances to fund large scale purchases of qualifying high-quality assets, 8 such as Government of Canada marketable securities denominated in Canadian dollars. 9 The money paid by the BoC to Primary Dealers and other participants in exchange for the purchased assets ultimately becomes positive settlement balances, then deposited back at the end of the day with the BoC at the Deposit Rate.

The last key feature of the Bank of Canada's framework is the ability to reinforce the target for the overnight rate throughout the day by conducting open market operations at the target rate. When the conditions in the Canadian general collateral overnight repo market so warrant, the BoC may intervene and inject intraday liquidity through overnight repurchase agreements (OR operations) or withdraw intraday liquidity through reverse repurchase agreements (ORR operations). These operations are conducted through a competitive auction to channel funds to the counterparties that need them most, and if necessary, the BoC is prepared to enter into multiple rounds of open market operations.

2

Measured by the total consumer price index (CPI).

5

For a primer on the Bank of Canada's Balance Sheet and its management, see: https://www.bankofcanada.ca/2021/09/bank-canada-balance-sheet/

6

For a primer on the payment systems Lynx and its predecessor LVTS, see: https://www.bankofcanada.ca/core-functions/monetary-policy/lynx/

7

The BoC may transfer government balances from its balance sheet to the system participants using the Receiver General auctions. This transfer helps to achieve the targeted settlement balances.

8

The Bank of Canada can deploy a series of monetary policy tools in a low interest-rate environment. See: https://www.bankofcanada.ca/wp-content/uploads/2015/12/framework-conducting-monetary-policy.pdf

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Governing Council, which consists of the Governor, the Senior Deputy Governor and four Deputy Governors
Major mandates 1 Inflation control target is agreed with the government every 5 years
Decision-making process Consensus
Frequency / length of meetings 8 times a year
Frequency of announcements Same
Main policy target Policy target: Inflation control target of 2%, midpoint of a 1% to 3% target range, measured as year-over-year change in total CPI. Main policy tool: Target for the overnight rate.

Overview of key features

Key policy rate Target overnight rate
maturity (days) 1
Operating target Collateralised overnight transactions
maturity (days) 1
Standing facilities Lending, deposit
Corridor width (bp) Typically 50 bps, when operating under a corridor system; 25 bps when operating under a floor system
Reserve requirements Zero
maintenance period N/A
Main operation 2 Repo / reverse repo
functions Liquidity injection / withdrawal
maturity (days) Liquidity injection / withdrawal
regular interval Liquidity injection / withdrawal
frequency Liquidity injection / withdrawal
Overall frequency As required
Discretion left to operational desk Use of overnight repos or reverse repos to reinforce target rate allocated at or near mid-point of the operating band 3
Key policy signals via
announcement
keynote tender
standing facility
other

Monetary policy communication

Explicit use of forward guidance No
Timing / media of policy announcement Yes, 10:00am EST on pre-determined announcement dates via central bank website and media in the lock up press room.
Policy announcement and documents Target policy rate and press release.
Explaining policy decisions All eight policy decisions per year include a press release. Four of these releases are accompanied by a detailed Monetary Policy Report and a Governor / Senior Deputy Governor press conference.
The other four press releases are followed the next day by an Economic Progress Report speech by a member of the Governing Council.
Dissemination of minutes (timing / media) No
Content of minutes N/A
Publication of forecasts 4 Every second policy decision in the quarterly Monetary Policy Report.
Publication of projected path of policy rate 5 No

Reserve requirements: ratios and size

Main functions served N/A
Domestic currency N/A
Foreign currency N/A
Average N/A
Required reserves Zero
Required reserve as % of GDP N/A
Actual reserves Zero but typically targets a pre-established low level of settlement balances in the payment system to support monetary policy framework related to overnight market, when operating under an interest rate corridor system. 6
Actual reserve as % of GDP N/A

Main features of reserve requirements

Averaging N/A
Carry-over N/A
Type N/A
Maintenance period N/A
end (day) N/A
Calculation period N/A
end (day) N/A
Lag before maintenance N/A
Vault cash N/A
restrictions N/A
Remuneration N/A
average rate N/A
marginal rate N/A
Framework last changed 06/92 7

Liquidity position and forecasting

Structural Position Surplus
Most volatile factor(s) Large payment flows
Most unpredictable factor(s) Government sector flows
Forecast horizon(s) 1 year
Frequency Daily
Frequency of revision Daily
Forecast published? Yes (only net payment system balances for the next day) 8

Standing facilities: lending / market ceiling

Name Standing Liquidity Facility; Overnight Standing Repo Facility
Form Secured loan,; Repo
Pricing method Fixed at the Bank rate as of the Credit Date 9
Maturity 1 day
Access limited by/to Participants in the Lynx payment system, eligible collateral; Primary Dealers; Government of Canada marketabler securities
Function(s) To reinforce the upper limit of the operating band, provide overnight liquidity at the end of the day

Standing facilities: deposit / market floor

Name Deposit facility
Form Deposit
Pricing method Fixed at lower limit of the operating band (Deposit Rate); Typically target overnight rate – 25 bps (when operating under corridor system), or equal to target rate (when operating under floor system)
Maturity 1 day
Access limited by/to Participants in the Lynx payment system
Function(s) To encourage transactions in the market for overnight funds at rates above the lower limit of the operating band (when operating in a corridor system), and to reinforce the target for the overnight rate (when operating under a floor system)

Open market operations: repo or reverse repo

Name/Type 10 Repo / reverse repo
Maturity 1 day
Frequency As needed
Pricing method Single price auction
Access limited by/to Primary Dealers, Government of Canada collateral
Function(s) Reinforce target rate

Open market operations: central bank bills

Name N/A
Total issuance N/A
Maturity N/A
Restrictions on possible maturities N/A
Pricing method N/A
Access limited by/to N/A
Discretion left to operational desk N/A

Open market operations: FX swaps

Maturity N/A
Frequency N/A
Pricing method N/A
Access limited by/to N/A
Function(s) N/A

Other significant liquidity management means

Name/Type 11 (i) Government morning cash balances auction
(ii) Government end of day cash balances auction
(iii) Overnight Standing Repo Facility
(iv) Outright purchases of Government of Canada bonds 12
Form (i) Overnight or term deposit with FIs
(ii) Overnight deposit with FIs
(iii) Repo
(iv) reverse auction
Frequency (i) Daily, when operating under corridor system
(ii) Daily, when operating undr corridor system
(iii) As needed
(iv) As needed
Maturity (i) Typically, 1 day but can term it out for longer based on needs
(ii) 1 day
(iii) 1 day
(iv) May include all maturities
Pricing Method (i) Auction
(ii) Auction
(iii) Upper limit of the operating band (Target overnight rate + 25 bps)
(iv) Multi-price auction
Access limited by/to (i) Federal crown or agency, Provincial govt or agency, Federal or provincial DTI, Primary Dealers / Collateralised
(ii) Payment system (Lynx) members
(iii) Primary Dealers, Government of Canada collateral
(iv) Primary dealers
Function(s) (i) Allows BoC to achieve end of the day target for settlement balances in the Lynx payment system, when operating under corridor system
(ii) Allows BoC to achieve end of the day target for settlement balances in the Lynx payment system, when operating under corridor system
(iii) Standing liquidity facility for Primary Dealers
(iv) Monetary policy implementation

Settlement systems and intra-day liquidity facilities

Settlement system Lynx since September 2021, previously Large Value Transfer System (LVTS) since 1999
Intra-day liquidity facility Intra-day pledged collateral
Charge No charge
Foreign currency settlement system No
CLS participation by banks Yes
Other settlement system(s) CDSX (securities settlement system)

Collateral

Standing facilities: List of eligible collateral Only Canadian-dollar assets are eligible to be pledged as collateral with the exception of securities issued by the US Treasury in US dollars.
A wide range of securities from public and private sector issuers are eligible. Full list available at: https://www.bankofcanada.ca/2021/07/assets-eligible-collateral-standing-liquidity-facility-200721/
Standing facilities: Discretion of central bank on collateral 13 Notwithstanding the eligibility criteria, the Bank of Canada retains the right to reject or accept any asset at its discretion, and/or to impose additional risk mitigants such as higher margins or further concentration limits.
Open market operations: List of eligible collateral Directly issued Government of Canada marketable securities denominated in Canadian dollars
Open market operations: Discretion of central bank on collateral 14 The operations are discretionary, but once offered, the Bank will accept the specified collateral up to the amount available to the counterparty.

Dissemination of operational information: liquidity forecast

Forecast published? Yes
Channel(s) BOC Website
Timing 4:20 pm
Remarks Same-day final level of excess settlement balances in the payment system and the target level for the following business day

Dissemination of operational information: open market operations

Volume and price published? Yes
Channel(s) BOC website
Timing Cash value of open market operations announced shortly after each operation.

Dissemination of operational information: standing facilities

Lending facility usage: Channel(s) BOC website
Lending facility usage: Timing Monthly average and actual Wednesday amounts published at a weekly frequency with a 1-week lag
Deposit facility usage: Channel(s) BOC website
Deposit facility usage: Timing Monthly average and actual Wednesday amounts published at a weekly frequency with a 1-week lag

Other information dissemination

Type (i) FX intervention
(ii) Results of term repo operations
(iii) Canadian Overnight Repo Rate Average
(iv) Overnight Money Market Financing Rate
Channel(s) BOC website
Timing (i) When intervention takes place
(ii) When operations take place
(iii) Daily
(iv) Daily

1 Describe as well the legal status of the mandate and involvement of government

2 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).

3 The Bank of Canada may conduct overnight repo (reverse) operations in which the Bank offers to purchase (sell) Government securities with an agreement to sell (buy) them back on the next business day, with the difference in price equal to the value of interest for one business day and is determined using a uniform price auction.

4 For instance, economic and inflation forecasts related to policy decision.

5 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.

6 See https://www.bankofcanada.ca/core-functions/monetary-policy/lynx/and https://www.bankofcanada.ca/2020/03/temporary-changes-bank-canada-standing-liquidity-facility/ for more details.

7 https://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-8.pdf

8 The Bank of Canada provides general guidance on the level of payment system settlement balances through the implementation of its monetary policy framework (typically leaving a small level of positive balances), but the Bank reserves the right to adjust this target upwards or downwards. The daily target for the next day is posted on the Bank’s website, along with the current day’s actual settlement balances.

9 https://www.bankofcanada.ca/wp-content/uploads/2015/12/rules-governing-advances-financial-institutions.pdf

10 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).

11 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.

12 See https://www.bankofcanada.ca/markets/market-operations-liquidity-provision/market-operations-programs-and-facilities/government-canada-bond-purchase-program/ for more information on Canada's Government of Canada Bond Purchase program.

13 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.

14 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.