CHAPTER 17 Tools of Monetary Policy 445 Hence, reverse repos, also known as Sale and Repurchase Agreements (SRAs), alleviate undesired downward pressure on the overnight financing rate Because the effects on settlement balances of SPRAs and SRAs are reversed on the day the agreement matures, SPRAs and SRAs are actually temporary open market operations Moreover, as you will see in the next section, because the effects on settlement balances of SPRAs and SRAs are typically neutralized by the end of the day by the Bank of Canada, there is no change at the end of the day in the level of settlement balances in the system Advantages of SPRAs and SRAs The Bank of Canada s repurchase transactions, either special PRAs or SRAs, have several advantages over other tools of monetary policy They occur at the initiative of the Bank of Canada, which has complete control over their volume, and are easily reversed Moreover, the Bank of Canada can enter into multiple rounds of open-market-buyback operations and can also conduct these operations outside of the regular timeframe However, open-market-buyback operations tend to be infrequent and small, because the channel/corridor system for setting the overnight interest rate requires a minimal amount of such operations As can be seen in Figure 17-7, which shows special PRAs and SRAs over the 1999 to 2008 period, the Bank of Canada conducted repurchase transactions on about 70 days per year (on average) over this period SETT LE ME NT BAL ANC ES MA NAG EM EN T In addition to targeting the overnight interest rate at the mid-point of the operating band, the Bank of Canada also targets the level of settlement balances in the system Typically, the target level of settlement balances is announced the previous day Initially, the Bank targeted a daily level of settlement balances of zero or greater (usually $25 million), but recently, because of pressures on the overnight rate, the Bank made several adjustments to the target level of settlement balances 2500 Special PRAs SRAs 2000 1500 1000 500 500 1000 1500 F I G U R E 17- Special PRA and SRA Operations Source: Bank of Canada website, www.bankofcanada.ca 8/4/2008 2/4/2007 8/4/2007 2/4/2008 8/4/2006 2/4/2006 2/4/2005 8/4/2005 8/4/2003 2/4/2004 8/4/2004 8/4/2002 2/4/2003 8/4/2001 2/4/2002 8/4/2000 2/4/2001 2/4/2000 8/4/1999 2/4/1999 2000