Canada's Central Bank has adopted a floating rate for its "bank rate," the Canadian equivalent of the U.S. Federal Reserve discount rate.
The Bank of Canada said the flexible-rate system will enable it to maintain interest rates in Canada at a level as low as the economy will allow.
But many observers say the decision appears to be political, intended to help the Federal Liberal government avoid the anger of Canadians at rising interest rates.
The Central Bank has operated with a fixed bank rate since 1962, after using a floating-rate system between 1956 and 1962 as a means of stabilizing securities markets and pegging the Canadian dollar at 92.5 cents (U.S.).
Under the new system, the Central Bank will adjust the rate weekly at one quarter of a percentage point higher than the yield on 91-day Federal Treasury bills.
As a result of the switch, rates will move regularly and more gradually than they have in the past. The bank rate currently is 14 percent, with the first revision to be made Thursday.
Movement in the bank rate is often a signal of the direction the Central Bank wants interest rates to move in Canada. The chartered banks here charge a 15 percent prime rate on best-risk business loans, compared with a U.S. prime of 17.75 percent.
The disparity between Canadian and U.S. rates has put downward pressure on the Canadian dollars in foreign-exchange trading. News of the floating rate suggested to market participants that the Central Bank is concerned about the level of the Canadian dollar.
In Toronto today, the dollar was quoted at 85.73 cents U.S., up one-tenth of a cent from yesterday. During the past week, the Canadian currency has gone above 1.75 cents against U.S. funds in the face of rising U.S. interest rates.