Canadian Overnight Money Market Rate

What Is the Canadian Overnight Money Market Rate?

The Canadian overnight money market rate is a measure or estimate of the interest rate at which major dealers can organize the financing of securities inventory for one business day. It is ordered by the Bank of Canada (BOC) by the day's end in light of a study of major participants in the overnight market.

Understanding the Canadian Overnight Money Market Rate

The Canadian overnight money market rate addresses the weighted-average repo funding cost of major money market dealers. It is a less unpredictable measure of the collateralized overnight rate contrasted with different rates since it incorporates a greater volume of overnight transactions from additional participants.

The central bank completes monetary policy by affecting short-term interest rates. The bank raises and brings down the target for the overnight rate. The overnight rate is the rate at which major financial institutions borrow and loan one-day (overnight) funds to and from one another; the Bank sets a target level for that rate. This target for the overnight rate is frequently alluded to as the Bank's policy interest rate.

The Effect of Changes in the Overnight Rate

Changes in the target for the overnight rate influence other interest rates. Consumer loans and mortgages, for instance. They likewise influence the conversion standard of the Canadian dollar. In November 2000, the Bank chose to make declarations concerning any policy interest rate changes on eight pre-determined dates every year.

Canada's major financial institutions borrow and loan money overnight among themselves to cover their transactions by the day's end. Through the Large Value Transfer System (LVTS), these institutions conduct large transactions electronically. Toward the day's end, traders must settle with one another. While one bank might have excess funds toward the day's end trading, another bank might require money, and this trading of funds addresses the overnight market. The overnight rate is the interest charged on those loans.

The Overnight Rate Operating Bands

The Bank of Canada has a system of an "operating band" for overnight trading." This band is one-half of a percentage point wide and at the center of the bank is the target for the overnight rate. For instance, in the event that the operating band is from 2.25 to 2.75%, the target for the overnight rate is 2.5%. The highest point of that band, 2.75%, is the bank rate — the interest rate that the bank charges on one-day loans to LVTS participants. The lower part of the band, 2.25%, is the deposit rate — the interest rate that the bank pays on any surplus left on deposit overnight at the bank.

Since LVTS participants realize that the Bank of Canada will constantly loan them money at the top rate of the band and will pay interest on deposits at the base rate of the band, there is no great explanation to trade at rates outside the band. The Bank can likewise mediate in the overnight market at the target rate assuming that the market rate is moving away from the target.

The target for the overnight rate is the leaned toward rate for international examinations. It is considered comparable with the U.S. Federal Reserve's target for the Federal funds rate, the Bank of England's fourteen day "repo rate" and the base bid rate for refinancing operations (the repo rate) of the European Central Bank.

Any changes in the target for the overnight rate will influence market interest rates and are viewed as an indicator of the heading of short-term interest rates. Also, changes in the target rate generally lead to moves in the prime rate of commercial banks.

Features

• The Bank of Canada is responsible for setting monetary policy, including setting short-term interest rates and controlling the flow of money through the economy.
• The target rate is the average interest rate being used when financial institutions loan each other money overnight, to be utilized for one day, in order to cover the borrowing bank's daily transactions.
• The Canadian overnight money market rate is a bank lending rate directed by the Bank of Canada, Canada's central bank.