Definition of the overnight money market rate in Canada

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What is the Canadian overnight money market rate?

The overnight Canadian money market rate is a measure or estimate of the interest rate at which large brokers can arrange to finance stocks of securities for a business day. It is compiled by the Bank of Canada (BOC) at the end of the day based on a survey of major day-to-day market participants.

Key points to remember

  • The Canadian overnight money market rate is a bank lending rate overseen by the Bank of Canada, the central bank of Canada.
  • The Bank of Canada is responsible for setting monetary policy, including setting short-term interest rates and regulating the flow of money in the economy.
  • The target rate is the average interest rate in effect when financial institutions lend each other money overnight, to be used during a day, so as to cover the day-to-day operations of the borrowing bank.

Understanding the Canadian Overnight Money Market Rate

The Canadian overnight money market rate represents the weighted average cost of funding repo transactions from major money market brokers. This is a less volatile measure of the guaranteed overnight rate compared to other rates because it includes a greater volume of overnight transactions from a greater number of participants.

The central bank conducts monetary policy by influencing short-term interest rates. The bank raises and lowers the target for the overnight rate. The overnight rate is the rate at which large financial institutions borrow and lend overnight (overnight) funds to each other; the Bank sets a target level for this rate. This target for the overnight rate is often referred to as the Bank’s policy interest rate.

The effect of overnight rate changes

Changes in the target for the overnight rate affect other interest rates. Consumer loans and mortgages, for example. They also affect the exchange rate of the Canadian dollar. In November 2000, the Bank decided to make announcements of any change in key interest rates on eight predetermined dates each year.

Canada’s major financial institutions borrow and lend money between themselves overnight to cover their transactions at the end of the day. Using the Large Value Transfer System (LVTS), these institutions conduct large transactions electronically. Ultimately, traders have to settle with each other. While one bank may have excess funds at the end of the trading day, another bank may need money, and that fund trading represents the day-to-day market. The overnight rate is the interest charged on these loans.

The operating tranches of the overnight rate

The Bank of Canada has an “operating band” system for day-to-day operations. This band is half a percentage point wide and at the center of the bank is the target for the overnight rate. For example, if the operating range is 2.25 to 2.75%, the target for the overnight rate is 2.5%. The top of that range, 2.75%, is the bank rate — the interest rate the bank charges on day-long loans to LVTS participants. The bottom end of the range, 2.25%, is the deposit rate — the interest rate the bank pays on any excess left on deposit overnight at the bank.

Since LVTS participants know that the Bank of Canada will always lend them money at the higher rate in the range and pay interest on deposits at the lower rate in the range, there is no reason to negotiate at rates outside the range. The Bank can also intervene in the overnight market at the target rate if the market rate deviates from the target.

The target for the overnight rate is the preferred rate for international comparisons. It is considered to be comparable to the US Federal Reserve target for the federal funds rate, the Bank of England two-week “repo rate” and the minimum bid rate for refinancing operations (the repo rate). ) of the European Central Bank.

Any change in the target for the overnight rate will affect market interest rates and is considered an indicator of the direction of short-term interest rates. In addition, changes in the target rate usually result in changes in the prime rate of commercial banks.


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