The policy interest rate is an interest rate that the central bank in a country is responsible for setting. Since 2000, the Bank of Canada announces the policy interest eight times per year, on fixed dates. It publishes this interest rate on its website.
The policy interest rate is set in order to influence various monetary variables in a country such as exchange rates, consumer prices, loans and other interests rates in the economy. The reason that this policy/overnight interest rate has such a huge impact on the economy as a whole is that it is the rate that most banks can borrow and obtain money from the central bank. So if a bank can borrow money for cheap, they are likely to offer better deals to individuals. However, if the interest rate is high for the bank to get money, you can bet they are going to charge you more as well.
Basically, a rise in this interest rate will likely be used to slow inflation, stop a depreciating currency, slow excessive credit growth and more. A drop in interest rates, however, might be looking to boost economic activity and get more people involved (which they likely will because interest rates are so low). Each country has their own central bank and policy interest rate, and it can vary greatly from country to country.Go back to the encyclopedia index