A central bank can use its monetary power and interest rates to pursue one of the three possible instrument objectives. It could: premium credit rate: the basis for setting interest rates calculated by banks for loans and lines of credit. But she has to make a choice. The control of one of these instrument objectives uses all the power of the Central Bank and cannot, at the same time, pursue a second objective. 42 Lenders of Last Resort Bank of Canada important for the prevention of financial panic as a lender of last resort. Provides emergency loans (against eligible guarantees) for up to 6 months Prevents bank failures and financial panics Copyright 2011 Pearson Canada Inc. The Bank will issue a market communication next year on its plan to acquire Canadian government securities in the secondary market. If these purchases were to be made, the terms of sale would also be published in advance. The bank interest rate now marks the top part of this operating band for the overnight interest rate.
That is always the rate at which the Bank of Canada is prepared to lend to banks. The low operating bandwidth, the deposit rate, is the interest rate paid by the Bank of Canada on deposits. Since the highest cost of bond financing of bank rates and the lowest return on loans being the deposit rate paid by the Bank of Canada, the interest rate on bank overnight loans and loans is within the bank`s target range. A central bank may choose to set the exchange rate because it believes it is the best way to achieve the broader monetary policy objectives. Canada operated from 1962 to 1970 with fixed exchange rates. The canadian dollar price was set at $1.075 and the Bank of Canada focused its monetary policy on this objective. In the late 1950s and early 1960s, there was an intense debate about the Bank of Canada`s monetary policy. Economic growth has been slow, unemployment rates have been high and financial markets have been tormented. A fixed exchange rate was considered the best solution to these economic problems. It essentially gave Canada monetary policy in the United States, where economic performance was stronger and more stable than in Canada.
The fixed exchange rate target determined Canadian interest rates and money supply until 1970. Foreign exchange purchases or sales change the domestic monetary base as well as open market operations in the domestic money market. Domestic money supply and interest rates change until the gap between domestic and foreign interest rates is eliminated. In order to maintain a fixed exchange rate target, the central bank compares domestic interest rates to those of the country where it wants to set its exchange rate.