The Bank of Canada implements its monetary policy, influencing short-term rates by means of changing the overnight rate goal.
Overnight rate, is generally the rate that is used as a lending rate between major financial institutions.
This rateis one of the most important mechanisms to assist the national economy regulation.
With the reduction of the discount rates, the commercial banks demand for loans from the Central Bank increases.
Simultaneously, commercial banks reserves are increased together with their ability to give loans to businessmen and population. The Banks’ rate of interest is also reduced. The stock of money supply in the country increases. On the contrary, whenever it is necessary to decrease business activity, having reduced the stock of money supply in the country, the Central Bank increases the discount rate. The discount rate increase is also a way to fight against inflation.
Effect of market
The discount rate alteration decision causes one of the strongest market responses. The discount rate rise should support the Canadian Dollar.