The Bank of Canada uses special purchase and resell agreements with primary dealers to increase liquidity and reduce overnight interest rates. This involves buying government bonds and selling them back at a set price the next day. The Bank assesses the overnight funds trading rate each morning and may be involved in trading government bonds during the overnight deal. Special purchases are not the same as special buy sales advertised by retailers.
A special purchase is a purchase made by the Bank of Canada as part of an open market operation designed to increase liquidity in the Canadian market overnight. This is done under a special purchase and resell agreement with a primary dealer, an entity that trades high-volume government bonds. Special buying, in addition to increasing liquidity for the main dealer and the market by extension, also reduces overnight interest rates. The Bank of Canada makes arrangements for such trades if it becomes clear that the market is heading in a direction that could benefit from lower interest rates and higher liquidity.
In a special buy-and-sell arrangement, the Bank buys government bonds and the seller agrees to buy them back at a set price the next day. This has the effect of increasing liquidity as the Bank supplies currency to the retailer. It also reduces interest rates by freeing up currency for loans. In contrast, a sell-and-repurchase arrangement, the Bank sells securities to a seller overnight, with the Bank buying them back in the morning.
In the late morning each day, the Bank of Canada assesses the overnight funds trading rate. If this rate falls below the Bank’s target rate, enter into special purchase and resale agreements with primary retailers. The Bank may be involved in trading government bonds and other types of government bonds during the overnight deal.
The Bank of Canada has been Canada’s central bank since 1935. Like other central banks, it uses open market operations to keep the economy stable and promote economic growth and economic activity. It is also involved in setting interest rates and other activities designed to propel the economy in the direction of healthy growth. Open market operations of this nature must be carried out carefully in order to avoid undue influence on the economy, which could suppress rather than promote economic activity.
Advertisements sometimes include the phrase “special purchase,” and in this sense do not refer to open market operations conducted by the Bank of Canada. Instead it is a trick of language that is used to satisfy laws on how sales can be advertised. A special buy sale reflects a sale of merchandise that is different in quality from a retailer’s normal merchandise and offered at a much lower price.
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