When the Bank of Canada lowers the operating band for the overnight interest rate,it ________.

Question

Quizplus · Accepted Answer

When the Bank of Canada lowers the operating band for the overnight interest rate, it influences the short-term interest rates in the economy. The Bank Rate, which is the interest rate charged by the Bank of Canada on loans to chartered banks, is typically set at 0.25% above the target for the overnight rate. Hence, when the operating band for the overnight interest rate is lowered, the Bank Rate is also lowered by the same amount (as mentioned in option A).

Additionally, a decrease in the overnight interest rate target encourages LVTS participants to borrow reserves either from each other or from the Bank of Canada to meet their settlement obligations. Hence, option B is also correct.

Option C is incorrect because a decrease in the overnight interest rate target increases the supply of money, as it reduces the cost of borrowing and encourages lending, which ultimately increases the monetary base and money supply.

When the Bank of Canada Lowers the Operating Band for the Overnight