“Tightening” is a course of action undertaken by the Bank of Canada (BoC) to constrict spending in an economy that is seen to be growing too quickly, or to curb inflation when it is rising too fast.

The BoC “makes money tight” by raising its key short-term interest rate (also known as the overnight target rate), which increases the cost of borrowing and effectively reduces its attractiveness.

Policy loosening is the exact opposite of tightening. In that case, the BoC lowers it’s overnight rate to encourage borrowing and spending and stimulate a flagging economy.

Last modified: August 20, 2011