In this episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard on…
The Bank of Canada is the nation’s central bank. It was originally created to assist in the management of the country’s financial system and still serves as the sole distributor of banknotes. Their goal is to “promote the economic and financial welfare of Canada.” In other words, their job is to support the economy by ensuring that there is steady and slow growth. This means that Canadians aren’t negatively affected by any sudden fluctuations. The bank helps guarantee steady growth by using their four major areas of responsibility. These are monetary policy, financial system, currency, and fund management.
The importance of the Bank of Canada
Having a self-regulating monetary organization, like the Bank of Canada, allows for there to be a separation between the power to create money and the power to spend money. The bank influences the supply of money that is circulating in the economy by using the framework of its monetary policy to help keep inflation predictable. The Bank of Canada also promotes safe and efficient financial systems that are both within Canada and internationally, as well as conducting transactions in support of their objectives. While the bank does not play any part in the regulation of commercial banks, they provide effective fund management and central banking services for the Government of Canada.
How the Bank of Canada reacts to inflation
The Bank of Canada sets its overnight rate eight times a year to target its monetary policy. The overnight rate serves as the benchmark that large banks and other financial institutions use to set their interest rates for mortgages and other forms of lending. For example, if the Bank of Canada needs to increase inflation, it will drop overnight rates. This allows banks and other lenders to lower their mortgage rates, credit card rates, and other personal loan rates. The same concept applies if the bank needs to decrease inflation. They will raise overnight rates; which means that consumers will be more cautious about borrowing and will help cool hot markets, like the housing market.
Each time the overnight rate changes, banks change their lending rates. The bank does not set the rates for lenders but rather guides them. Therefore, you will see different rates among lenders and banks. They look at a variety of factors when setting their lending rates such as political situations worldwide, trade policies, and the strength of a borrower’s application and credit history.