Bank Rate

The bank rate is the minimum interest rate charged by the Bank of Canada in its role as lender of last resort on short-term loans to the chartered banks and other members of the Canadian Payments Association that maintain deposits with the Bank, as well as to investment dealers. Generally the Bank has preferred to let market forces determine the bank rate, but it may on some occasions nudge the rate in a desired direction by open market operations or by changes in the cash reserves of the banking system prior to the setting of the bank rate or through its own bids for treasury bills.

Throughout most of its history, the bank rate was fixed from time to time by the Bank of Canada as an important signal of government monetary policy. The rigidity of this method was supplanted in 1980 by the present method of tying the bank rate to the weekly offering of treasury bills by the Bank of Canada. Certain investment dealers, called primary distributors or jobbers, are permitted to submit bids each week for 3-month, 6-month and 1-year treasury bills of the federal government. The average yield on the 3-month bills sold at the auction is calculated by the Bank, which then sets the bank rate at one-quarter of one percentage point above that yield.

In 1996 the method of setting the bank rate was again changed. The Bank sets a band of 0.5 or 1% for the interest rate on its overnight lending, and the bank rate is set at the upper limit of this trading band. This rate is usually higher than comparable rates of short-term credit in order to encourage borrowers to obtain funds elsewhere.

See also Banking.