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QuestionWhat kind of role does the official discount rate -- the basic interest rate that was used by the Bank in providing loans to financial institutions -- currently play?

Answer

The Bank's main market operation used to be lending to financial institutions at the official discount rate instead of open market operations. During the period when interest rates were regulated, because there was a link between the official discount rate and various interest rates such as deposit rates, these interest rates were revised in line with changes in the official discount rate. For this reason, the official discount rate was the representative policy interest rate, indicating the basic stance of the monetary policy.

However, with the completion of the deregulation of interest rates in 1994, the direct link between the official discount rate and deposit rates disappeared. In its place, various interest rates are now determined by arbitrage activities in financial markets. In such a situation, the previously adopted official discount rate is now called the basic loan rate -- the loan rate applied to the Complementary Lending Facility -- and acts as a ceiling on the uncollateralized overnight call rate.

Developments in the basic loan rate are available at The Basic Discount Rates and Basic Loan Rates (Previously Indicated as "Official Discount Rates").

Complementary Lending Facility

The Complementary Lending Facility -- introduced in February 2001 -- is a lending facility in which the Bank extends loans at the request of eligible counterparties based on pre-specified conditions, including the maturity of the loans being set as overnight. The amount of the loans should not exceed the total value of collateral submitted by counterparties to the Bank. The counterparties eligible for this facility are financial institutions, such as banks and securities companies, that request to use the facility and are deemed sufficiently creditworthy by the Bank.

Financial institutions are clearly assumed to use the Complementary Lending Facility at all times when money market interest rates rise higher than the basic loan rate applied to this facility. As a result, the basic loan rate applied to this facility is expected to set a ceiling, beyond which money market interest rates will not rise.