Final answer:
The operating target of the Bank of Canada's monetary policy is typically the overnight rate, which would likely be slightly lower than the 3.5% deposit rate paid to LVTS participants. The bank rate is usually set higher than this operating target to encourage interbank borrowing.
Step-by-step explanation:
When the Bank of Canada sets an interest rate on deposits for LVTS (Large Value Transfer System) participants, it is a component of the central bank's monetary policy framework. While the actual operating target of the Bank's monetary policy is not specified in the question, typically, the operating target is the overnight rate, which is a very short-term interest rate. It is usually closely aligned with the rate paid on deposits by the central bank to ensure control over the general level of interest rates. The bank rate, often referred to as the discount rate in some countries, is usually set higher than the target overnight rate and is the rate at which the central bank lends short-term funds to commercial banks.
For instance, if the overnight target rate is set at 3.25%, the bank rate might be set at 3.5%, which is 0.25 percentage points above the target. This difference creates an incentive for banks to borrow from each other at the lower overnight rate instead of borrowing from the central bank at the higher bank rate.
In summary, while the exact operating target is not provided, we can generally deduce that it is slightly lower than the rate paid on deposits, as the bank rate tends to be a bit above the target rate to encourage interbank lending.