The policy rate, the operating band and how it is enforced

One rate, one night

Every business day Canada's financial institutions settle the payments their customers made — debit purchases, e-transfers, cheques. Some end the day owing, some owed, and they lend to one another overnight to square up. The Bank of Canada's policy interest rate is its target for the overnight rate: the rate it wants those one-night loans to carry. Nobody outside the banks borrows in that market, yet everything from prime to GIC rates keys off it. At time of writing the target is 2.25 % (held at the 2 September 2026 announcement).

The operating band

An institution need not borrow from a peer. It can leave money with the Bank overnight at the deposit rate, or borrow from the Bank at the bank rate. No bank will lend to a peer for less than the deposit rate or borrow from one for more than the bank rate, so the two rates fence the overnight rate in: they are the edges of the operating band.

Under the floor system the Bank has used since 2020, the band is 30 basis points wide and the target sits just above the floor: the deposit rate is target − 0.05 % (an offset introduced on 30 January 2025 — before that the deposit rate equalled the target) and the bank rate is target + 0.25 %. Under the pre-2020 corridor system the band was 50 bp wide with the target in the middle: deposit rate target − 0.25 %, bank rate target + 0.25 %.

Worked example — a 2.75 % target

Suppose the target were 2.75 %. Bank rate: =B2+0.0025 = 3.00 %. Deposit rate, floor system: =B2-0.0005 = 2.70 %. Deposit rate, old corridor: =B2-0.0025 = 2.50 %. The bank rate is the same under both regimes; what changed is how far below the target the floor sits. A basis point is a hundredth of a percentage point, so 0.05 % is 0.0005 as a decimal — the paper's rate cells are decimals.

Eight dates, and the tools between them

Since 2000 the Bank has announced the target on eight fixed dates a year; the 2026 dates are 28 January, 18 March, 29 April, 10 June, 15 July, 2 September, 28 October and 9 December. Changes outside the schedule are for emergencies (twice in March 2020).

Between announcements the Bank keeps the overnight rate on target with open-market operations: repos (it buys securities from dealers with an agreement to sell them back — adding cash to the system and pushing the rate down) and reverse repos (the mirror — draining cash). Since the floor system, standing deposits at the deposit rate do most of the anchoring. When the target is already near zero, the Bank can buy Government of Canada bonds outright — quantitative easing — to push longer-term yields down; selling or letting them mature is quantitative tightening.

What Canada does not have is a reserve requirement. US textbooks list three Fed tools — open-market operations, the discount rate, reserve requirements. Canadian banks face no required reserve ratio, and any answer that has the Bank "raising reserve requirements" is a transplant.

Recompute at 3.25 %

Bank rate =0.0325+0.0025 = 3.50 %; deposit rate =0.0325-0.0005 = 3.20 %; corridor deposit rate =0.0325-0.0025 = 3.00 %.