Canada

Canada[CA$]

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. It does this by setting the 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. The level of the overnight interest rate and expectations about its future path, also influences 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:

  1. Target for the overnight rate: the key policy interest rate that the BoC sets to meet its monetary policy objectives, which 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;
  2. Operating band and standing deposit/liquidity facilities: a 50 basis point interest rate corridor around the BoC's target for the overnight rate that steers market participants to lend/borrow money in the overnight market near the target rate, with the BoC lending money at the top of the band (at target plus 25 basis points) or taking deposits at the bottom of the band (at target minus 25 basis points) through its standing facilities;
  3. Settlement Balances or Cash Setting: the amount of excess or deficit deposits supplied to Large Value Transfer System (LVTS) participants on a daily basis to reinforce the target rate;
  4. Open market operations: open market Overnight Repo (OR) / Overnight Reverse Repo (ORR) reverse repo transactions that are conducted to reinforce the target overnight rate.

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 to signal to major participants in money markets the level that the BoC would like to see them borrow and lend funds for a term of one business day. It is the primary and most transparent collateralised overnight rate in Canada and is actively traded in the over-the-counter repo market and via the inter-dealer brokers. The BoC monitors transactions in the overnight market to determine whether open market operations are required to reinforce the target for the overnight rate.

The Bank of Canada's implementation of monetary policy is closely linked to Canada's main payment system - the LVTS, whereby almost all payments (measured by value) flow through. One key feature of the BoC's framework is the operating band, otherwise known as the interest rate corridor, which is supported by standing deposit and lending facilities. The BoC's target for the overnight rate is the midpoint of this 50 basis point band, which is bound by the BoC's standing facilities available to direct members in the LVTS. This encourages transactions for overnight funds in the market at rates within the band. If no excess balances are left in the system, the aggregate position of all LVTS members in their settlement accounts at the BoC will, at the end of the day, 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 at target rate minus 25 bps (known as the Deposit Rate), while members with a deficit position must take an overnight collateralised advance from the BoC at the target rate plus 25 bps (known as the Bank Rate).

Another key feature of the Bank of Canada's framework is the ability to adjust the level of the settlement balances available in the system to address frictions in the payments system and to further support trading at the target for the overnight rate. 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. In the early 2000s, soon after the introduction of the LVTS, settlement balances were actively used to influence the overnight rate. In subsequent years, the targeted level of settlement balances has been adjusted in anticipation of seasonal or temporary upward pressure on the overnight rate, for example around quarter-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.

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 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.

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 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) 50
Reserve requirements Zero
maintenance period N/A
Main operation 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
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 next day by a speech by a member of the Governing Council.
Dissemination of minutes (timing / media) No
Content of minutes N/A
Publication of forecasts Every second policy decision in the quarterly Monetary Policy Report.
Publication of projected path of policy rate No

Reserve requirements: ratios and size

Main functions served N/A
Domestic currency
Foreign currency
Average
Required reserves Zero
Required reserve as % of GDP
Actual reserves Zero but targets a pre-established level of settlement balances (currently CAD 250 m) in the payment system to support monetary policy framework related to overnight market
Actual reserve as % of GDP

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

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)

Standing facilities: lending / market ceiling

Name Standing Liquidity Facility
Form Secured loan
Pricing method Fixed at the upper end of the operating band. Target overnight rate + 25 bps (Bank rate)
Maturity 1 day
Access limited by/to Participants in the LVTS payment system, eligible collateral
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; Target overnight rate – 25 bps (Deposit Rate)
Maturity 1 day
Access limited by/to Participants in the LVTS payment system
Function(s) To encourage transactions in the market for overnight funds at rates above the lower limit of the operating band

Open market operations: repo or reverse repo

Name/Type 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 (i) Government morning cash balances auction
(ii) Government end of day cash balances auction
(iii) Overnight Standing Repo Facility
Form (i) Deposit with FIs
(ii) Overnight deposit with FIs
(iii) Repo
Frequency (i) Daily
(ii) Daily
(iii) As needed
Maturity (i) Typically, 1 day but can term it out for longer based on needs
(ii) 1 day
(iii) 1 day
Pricing Method (i) Auction
(ii) Auction
(iii) Upper limit of the operating band (Target overnight rate + 25 bps)
Access limited by/to (i) Federal crown or agency, Provincial govt or agency, Federal or provincial DTI, Primary Dealers / Collateralised
(ii) Payment system (LVTS) members
(iii) Primary Dealers, Government of Canada collateral
Function(s) (i) Allows BoC to achieve end of the day target for settlement balances in the LVTS payment system
(ii) Allows BoC to achieve end of the day target for settlement balances in the LVTS payment system
(iii) Standing liquidity facility for Primary Dealers

Settlement systems and intra-day liquidity facilities

Settlement 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/markets/market-operations-liquidity-provision/browse-collateral-policies/.
Standing facilities: Discretion of central bank on collateral 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 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