DEFINITION of Special Purchase and Resale Agreement - SPRA
Central banks conduct various types of sale and repurchase agreements (repo transactions) as part of the open market operations they use to implement monetary policy. These are typically undertaken with the intention to affect liquidity and therefore interest rates in the money market. A Special Purchase and Resale Agreement (SPRA) is the specific name given to one of these operations when used by the Bank of Canada (BoC); its intention is to lower interest rates.
BREAKING DOWN Special Purchase and Resale Agreement - SPRA
Generally, in a repo transaction, two counterparties will enter into an agreement whereby one will sell securities to the other and simultaneously agree to repurchase them at a specified later date at a fixed price. The securities can therefore effectively be regarded as collateral for a cash loan. The securities involved are usually fixed-interest securities, and pricing is agreed in terms of interest rates. This agreed-upon interest rate is termed the repo rate. While many market participants engage in such transactions, when central banks do so it is usually only with certain banks in their domestic money markets, on a short-term basis, and undertaken with the aim of implementing monetary policy, that is, to help ensure interest rates in the money market reach the central bank's targeted rate.
The BoC sets a target for the overnight interest rate as its key policy rate (used in its goal of targeting inflation). In a Special Purchase and Resale Agreement (SPRA), the BoC will buy securities from a specified type of bank (namely, a primary dealer in Canadian government securities) with an agreement to sell them back to that bank the following day. The BoC offers to buy a fixed amount of securities at a fixed price, with pricing being at the BoC's target for the overnight rate. This gives a temporary injection of cash (as the banks receive the payment for the securities) into the money market, helping improve liquidity and lower overnight market interest rates. This operation will, therefore, be used when the BoC is trying to ease conditions in the domestic money market.
The BoC will engage in a corollary operation — a Sale and Repurchase Agreement, or SRA — when its aim is to tighten rather than ease conditions in the money market. (In this operation, the BoC will withdraw liquidity from the market by selling securities to banks.)