In an earlier commentary we took a look at what central banks are and what they do. In this piece we focus on the Bank of Canada.
Like other central banks around the world the Bank of Canada has the broad responsibility for managing the economic and financial welfare of the country.
The Bank of Canada was founded in 1934 and it is relatively young by central bank standards. In 1938 it became a Crown Corporation, which means it is owned by the federal government. The bank is governed by legislation in the Bank of Canada Act which says the bank exists “to regulate credit and currency in the best interests of the economic life of the nation.”
There are three main ways the Bank of Canada shows up in our daily lives.
Monetary Policy is designed to preserve the value of money. This is the part of the bank’s job that most people know about, because it gets the most coverage in the media. The factor in monetary policy is managing inflation to keep it low, stable and predictable.
The bank’s main tool for managing inflation is interest rates. The bank sets its Policy Rate eight times a year. It is the rate large financial institutions are charged when they borrow money from the Bank of Canada, or each other, to settle their daily accounts. The Policy Rate is also known as the “overnight” rate.
Financial institutions base their interest rates on the Policy Rate. As it goes up or down so do the rates for business and consumer borrowing such as variable rate mortgages, lines of credit and car loans. Raising interest rates makes borrowing and spending more expensive which slows down economic activity and inflation. Lowering rates does the opposite.
The Policy Rate can also influence the value of our dollar which affects the cost of Canadian goods and services on world markets. Higher interest rates tend to increase the value of the Canadian dollar, making Canadian goods more expensive which, again, slows economic activity and inflation.
So, you can see the bank is performing an economic balancing act.
The Bank of Canada is known as “the banker’s bank” and it helps manage and regulate the country’s Financial System. The bank facilitates borrowing and investing for Canada’s large financial institutions and it regulates those institutions. The bank controls how much they can lend out by setting standards for how the loans are secured and imposing cash reserve requirements.
The most obvious way the Bank of Canada enters our lives is through our Currency. The bank is responsible for designing, issuing and delivering bank notes (coins are the responsibility of the Royal Canadian Mint).