CHAPTER 17 FYI Tools of Monetary Policy Monetary Policy Implementation in the LVTS Environment In the LVTS environment, the Bank of Canada operates under a system of eight fixed dates throughout the year for announcing, via a press release (at 9:00 a.m.), the target and the operating band for the overnight interest rate The upper limit of the operating band defines the bank rate at which the Bank provides overdraft loans to LVTS participants at the end of the day and the lower limit is the rate the Bank pays to LVTS participants with positive settlement balances at the end of the day The operating band for the overnight rate, reinforced by the Bank s standing liquidity facilities, and a target level of settlement balances (of roughly $50 million) are currently the framework within which the Bank of Canada implements monetary policy The midpoint of the operating band, the policy rate, is the operating target of the Bank s monetary policy In targeting the midpoint of the operating band, the Bank of Canada will intervene in the overnight market at 11:45 a.m to conduct open market buyback operations at the target overnight interest rate, if required In particular, the Bank will use SPRAs if overnight funds are traded above the target for the overnight rate and SRAs if overnight funds are traded below the target for the overnight rate There will be no Bank of Canada intervention in the overnight market if the overnight rate is around the target rate To maintain the desired level of settlement balances, the Bank of Canada must neutralize the net impact of its open market buyback operations and of certain federal government and Bank of Canada flows that potentially affect settlement balances The neutralization is effected through the shifting (transfer) of federal government deposits (balances) between the government s account at the Bank of Canada and the par- ticipants in the auction of government cash balances The shifting is made through the twice-daily auctions of Receiver General (federal government) balances (the first at 9:15 a.m and the second at 4:15 p.m.) The LVTS has a pre-settlement trading period of half an hour, at the end of the banking day (6 6:30 p.m.), to permit participating financial institutions to adjust positions with each other (in the overnight market) at a better return than can be achieved at the Bank of Canada s standing facilities LVTS participants with settlement imbalances at the end of the banking day use the Bank of Canada s standing facilities to bring their settlement balances to the target level That is, LVTS participants that require an overdraft loan to cover negative settlement balances on the books of the Bank borrow from the Bank at the bank rate LVTS participants with positive settlement balances at the end of the day earn the bank rate less 50 basis points The Market Timetable 9:00 a.m 9:15 a.m 11:45 a.m 4:15 p.m 6:00 p.m 6:00 6:30 p.m 8:00 p.m or earlier Bank of Canada announces changes (if any) to the target and the operating band for the overnight rate Auction for (federal) government cash balances Open market buyback operations (if required) Auction for (federal) government cash balances Close of LVTS for client transactions Pre-settlement period Settlement of LVTS balances at the Bank of Canada Source: Donna Howard, A Primer on the Implementation of Monetary Policy in the LVTS Environment, Bank of Canada Review (Autumn, 1998): 57 66; The Framework for the Implementation of Monetary Policy in the Large Value Transfer System Environment, Bank of Canada Release, March 31, 1999 Reprinted with permission 435