FILE PHOTO: A sign is pictured in front of the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS / Chris Wattie / File PhotoCHRIS WATTIE / Reuters
The Bank of Canada has been criticized in recent months for high inflation, most notably Conservative candidate Pierre Poalievre, who tweeted in April that the institution was financially illiterate. During the Conservative leadership debate on Wednesday, Mr Poilievre said that if he formed a government, he would remove Bank of Canada Governor Typh McLem.
The next day, Prime Minister Justin Trudeau set Mr Poalier the task of threatening the independence of the Central Bank of Canada, adding that he seemed “either misunderstood or not interested in the facts at all”.
So what exactly does the Bank of Canada do, who runs it, and how does it affect ordinary Canadians? Here’s a breakdown.
What is the Bank of Canada and where is it located?
The Bank of Canada is the crowning corporation and financial institution that sits at the heart of the Canadian economy. Located in Ottawa, the central bank is responsible for banknotes – in other words, Canadian cash – and monetary policy: it sets interest rates, stabilizes the value of the Canadian dollar and helps the economy downturn. He is also a banker for the government, managing its public debt programs and foreign exchange reserves, and working with other financial regulators to ensure the stability of the banking system.
Why do we need a central bank at all?
The Bank of Canada’s primary goal is to protect the purchasing power of the Canadian dollar. This means keeping inflation – the rate at which consumer prices are rising – low and stable, around 2% each year.
In the past, the value of money has been tied to the amount of gold in bank vaults. The Canadian dollar later became pegged to the US dollar, which in turn was pegged to gold. This global monetary system collapsed in the 1970s, forcing central banks to devise other ways to fix the value of their money. In the 1990s, the Bank of China began “targeting inflation” – that is, setting monetary policy to keep inflation at around 2 percent.
The Bank of Canada also acts as a “lender of last resort” for financial institutions in the event of financial panic or bankruptcy. He can do this because of his unique ability to make money out of nothing. He acted in that capacity in March 2020, pumping billions of dollars in cash into the financial system to prevent Canadian credit markets from taking over until the economy crashed.
What is happening with inflation?
In the last year, inflation has exceeded the central bank’s target, reaching a three-decade high of 6.7% in March. There is considerable debate about the causes of this inflation, but most economists agree that this is due to a combination of supply chain blockade caused by COVID-19, a jump in consumer demand for durable goods instead of services during a pandemic blockade, super low interest rates and huge government support for businesses and households during the pandemic. More recently, Russia’s invasion of Ukraine has led to rising commodity prices, squeezing people into the gas station and grocery store.
How does the bank control inflation?
The Bank of Canada controls inflation by affecting demand in the economy. It cannot do much to bring down global commodity prices or correct supply chain problems, but it can curb demand for goods, services and housing by adjusting borrowing costs. When the economy is hot and prices are rising too fast, the bank raises interest rates to reduce demand.
In practice, the central bank changes interest rates mainly by adjusting the interest rate: the short-term interest rate, which determines how much commercial banks pay for overnight loans. This short-term interest rate affects other interest rates in the economy. The bank can also influence interest rates by communicating with financial markets and buying huge amounts of government bonds from investors – a practice known as quantitative easing (QE). BoC used QE for the first time during the pandemic, buying more than $ 300 billion worth of government bonds. Mr Poilievre’s criticism of the BoC revolves largely around the use of QE.
The bank maintained record low interest rates during the first two years of the pandemic to support the economy. Since then, both economic output and employment have recovered, and the economy is now overheating, increasing inflationary pressures. The bank turned around in March and began raising its base interest rate. He doubled interest rates – including a half percentage point increase in April – and said more interest rates are forthcoming. This is the fastest cycle of rising interest rates in decades.
The reference interest rate is currently 1% and Bank of Canada officials say they intend to return it to between 2% and 3% relatively quickly.
How will rising interest rates affect average Canadians?
When interest rates rise, loans become more expensive. Most Canadians experience interest rates through mortgages and through various forms of consumer debt, including credit cards, personal loans and car loans.
Commercial banks have already started raising mortgage rates in response to the actions of the Bank of Canada. The key interest rate used by banks to calculate interest rates on floating rate mortgages and equity credit lines has risen to 3.2% from 2.45% in 2021. Interest rates on fixed rate mortgages have also increased. rose.
Most homeowners in Canada have fixed rate mortgages, which means they will not feel higher interest rates until they renew. Similarly, many variable rate mortgages have fixed payments, which means that mortgage holders will not face a sudden jump in monthly costs with an increase in the key interest rate. However, they will have to pay more interest and less to the principal each month.
The biggest impact of rising interest rates is usually on the real estate sector in the economy, and the bank expects higher borrowing costs to take some of the fuel out of Canada’s housing market. There are some signs that Canada’s hottest housing markets have already begun to cool. Toronto home sales fell 27 percent in April from a month earlier, and an index measuring the city’s housing prices showed the first monthly drop since October 2020.
The BoC will closely monitor the housing market as it raises interest rates. How high and how fast it moves may depend on the stability of the housing market.
Who is responsible for all this?
The bank is governed by a governor appointed by the government for a seven-year term. The current governor, Typh McCallm, began his term in June 2020. The second commander is Senior Deputy Governor Carolyn Rodgers, who began her term in December 2021.
The Bank shall be supervised by a Board composed of the Governor, senior deputy governor and 12 independent members, each appointed for three years. Deputy Finance Minister Michael Sabia also sits on the board as a non-voting member.
Monetary policy decisions are taken by a separate seven-member board of directors, composed of Mr Maclem, Ms Rodgers and five other deputy governors. They meet every six to eight weeks to decide on interest rates and other monetary policy issues. These decisions are made public, setting the tone for Canada’s financial markets.
How much power does the government have over the Bank of Canada?
The Bank of Canada operates independently of the government on a daily basis, although Ottawa sets the bank’s overall monetary policy goals every five years. IN The principle of central bank independence is a cornerstone of Canada’s economic and financial system. The approach is based on the idea that controlling inflation sometimes requires difficult decisions that politicians are unlikely to make, such as raising interest rates to cool the economy.
Although the Minister of Finance has the power to chair the governor of the central bank in the event of a major disagreement over monetary policy, this power has never been used. The government is obliged to publish the directive, which according to most analysts will lead to the immediate resignation of the governor and cause a political crisis.
No government has ever formally removed a central bank governor, but there is an example of a prime minister effectively forcing a governor to resign. In 1961, Prime Minister John Diefenbaker had a public scandal with then-Governor James Coyne over disagreements over monetary and economic policy. Mr Diefenbaker tried to fire the governor, prompting parliament to declare his position vacant. The Senate rejected the move, but Mr Coyne resigned.
With a report by Matt Lundi
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