With the Bank of Canada announcement today, have you ever wondered who the Bank of Canada is and what is its role in our economy?
The Bank of Canada is the country’s central bank. Its role, as defined in the original Bank of Canada Act of 1934, is “to promote the economic and financial welfare of Canada. “
The Bank was founded in 1934 as a privately owned corporation. In 1938, the Bank became a Crown corporation belonging to the federal government. Since that time, the Minister of Finance has held the entire share capital issued by the Bank.
The Bank of Canada is not a department of the government but rather a special type of Crown Corporation. The Bank has considerable autonomy to carry out its responsibilities.
The Bank of Canada is responsible for:
- Monetary Policy – the goal of monetary policy is to contribute to solid economic performance and raising living standards for Canadians by keeping inflation low, stable, and predictable.
- Bank Notes – the Bank of Canada designs and issues bank notes that Canadians can use with the highest confidence.
- Financial System – the Bank of Canada actively promotes safe, sound, and efficient financial systems, both within Canada and internationally, and conducts transactions in financial markets in support of these objectives.
- Funds Management – the Bank of Canada provides high-quality, effective, and efficient funds-management and central banking services for the federal government, the Bank, and other clients.
The Bank of Canada was created to be the sole issuer of bank notes and to facilitate management of the country’s financial system.
By having an independent monetary institution it allows for the separation of the power to spend money from the power to create money.
Separating the central bank from the political process enables it to adopt the medium and long-term perspectives essential to conducting effective monetary policy.
The Bank carries out monetary policy by influencing short-term interest rates. It does this by raising and lowering the target for the overnight rate.
The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves; the Bank sets a target level for that rate. This target for the overnight rate is often referred to as the Bank’s key interest rate or key policy rate.
Changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages. They can also affect the exchange rate of the Canadian dollar.
In November 2000, the Bank introduced a system of eight fixed dates each year on which it announces whether or not it will change the key policy rate.
The Bank of Canada does not set the prime rate; financial institutions set their own prime rates based on the cost of short-term funds, and on competitive pressures among them. The Bank of Canada influences the cost of short-term funds by setting the target for the overnight rate.
The Bank Rate is the rate at which the Bank of Canada lends funds to financial institutions. It is set at 0.25 per cent above the target for the overnight rate, which is the Bank’s key policy rate. As seen in the past, larger banks don’t always pass the discount along to their clients when the Bank of Canada lowers its bank rate.
All the information gathered here for you was gathered from http://www.bankofcanada.ca/about/educational -resources/fgg/
I encourage you to go to the website or click on the highlighted links to expand your knowledge of our Canadian banking system.
Courtesy of Gerry Puhn, AMP – DLC Mountain View