Final answer:
The Bank of Canada uses SRAs to adjust the overnight interest rate band, influencing monetary policy and inflation targeting through open market operations.
Step-by-step explanation:
The Bank of Canada may use Sale and Repurchase Agreements (SRAs) to indicate a new lower or upper end of the band for the overnight interest rate. Through the use of SRAs, which are part of open market operations, the central bank sells securities with the agreement to repurchase them later, effectively managing the amount of money in the banking system and influencing short-term interest rates. SRAs can also reflect changes in other policy rates, like the federal funds rate, which is the rate at which banks lend to each other overnight. This is part of a broader set of tools including the discount rate, and reserve requirements that central banks use to manage monetary policy and control inflation as part of their inflation targeting mandates. During financial crises, the central bank acts as a lender of last resort, providing necessary funds to stabilize the financial system. Following the financial crisis of late 2008, the Federal Reserve, for example, undertook a policy of keeping the federal funds rate at a near-zero target, while also engaging in large-scale purchases of longer-term securities to make financial conditions more accommodative and support economic growth.