Bank of Canada (BOC)

The Bank of Canada is the nation's central bank. Its principal role is "to promote the economic and financial welfare of Canada," as defined in the Bank of Canada Act. The Bank’s four main areas of responsibility are:

•   Monetary policy: The Bank influences the supply of money circulating in the economy, using its monetary policy framework to keep inflation low and stable.

•   Financial system: The Bank promotes safe, sound and efficient financial systems, within Canada and internationally, and conducts transactions in financial markets in support of these objectives.

•   Currency: The Bank designs, issues and distributes Canada’s bank notes.

•   Funds management: The Bank is the "fiscal agent" for the Government of Canada, managing its public debt programs and foreign exchange reserves.

The Bank of Canada’s monetary committee responsible for rate decisions is known as the Governing Council. It consists of the governor of the Bank of Canada, a senior deputy Governor, and four deputy governors. The BOC has set an inflation target of 1-3% per year, and thus far has been successful in meeting that goal over the last 15 years.

The Governing Council

The Bank of Canada is led by the Governing Council, the policy-making body of the Bank, which is responsible for:

•   the conduct of monetary policy

•   promoting a safe and efficient financial system

•   charting the strategic direction of the Bank

The Governing Council is made up of the Governor, the Senior Deputy Governor and four Deputy Governors.

The Governing Council's main tool for implementing monetary policy is the target for the overnight rate (also known as the key policy rate). This rate is normally set on eight fixed announcement dates per year. The Council arrives at its decisions about the rate by consensus, rather than by individual votes, as is the case at some other central banks.

The Governor

As the Bank’s Chief Executive Officer, the Governor ultimately has full control over the business of the Bank. His responsibilities include:

• chairing the Board of Directors;
• leading the Bank’s Governing Council; and
• conducting monetary policy to achieve an inflation target agreed upon by the Bank and the Government of Canada.

The Governor and the Senior Deputy Governor are appointed by the independent directors with the approval of the Governor in Council (the federal Cabinet) for a seven-year term. This allows the Governor to adopt the medium- and longer-term perspective essential to conducting effective monetary policy.

The Senior Deputy Governor

The Senior Deputy Governor is the deputy executive of the Bank of Canada. She:

• oversees the Bank’s strategic planning and operations;
• shares responsibility for the conduct of monetary policy as a member of the Bank’s Governing Council; and
• is a member of the Bank’s Board of Directors.

The Board of Directors

The Board of Directors is appointed by the Minister of Finance for a three-year term, subject to the approval of the Governor in Council. It is composed of the Governor, the Senior Deputy Governor, 12 outside directors and the Deputy Minister of Finance (who has no vote). Their responsibilities include:

• providing general oversight of the management and administration of the Bank
• reviewing the Bank's general policies (on matters other than monetary policy and for approving the Bank's corporate objectives, plans and annual budget)
• keeping the Bank informed about prevailing economic conditions in their respective regions
• appointing the Governor and Senior Deputy Governor

Monetary policy is neither formulated nor implemented by the outside directors.

Monetary Policy

The Objective 

The objective of monetary policy is to preserve the value of money by keeping inflation low, stable and predictable. This allows Canadians to make spending and investment decisions with more confidence, encourages longer-term investment in Canada's economy, and contributes to sustained job creation and greater productivity. This in turn leads to improvements in our standard of living.

Canada’s monetary policy framework consists of two key components that work together: the inflation-control target and the flexible exchange rate. This framework helps make monetary policy actions readily understandable, and enables the Bank to demonstrate its accountability to Canadians. 

The Inflation-Control Target

At the heart of Canada’s monetary policy framework is the inflation-control target, which is two per cent, the midpoint of a 1 to 3 per cent target range. First introduced in 1991, the target is set jointly by the Bank of Canada and the federal government and reviewed every five years. However, the day-to-day conduct of monetary policy is the responsibility of the Bank’s Governing Council. The inflation-control target guides the Bank’s decisions on the appropriate setting for the policy interest rate, which is aimed at maintaining a stable price environment over the medium term. The Bank announces its policy rate settings on fixed announcement dates eight times a year.

Target for the overnight rate

The target for the overnight rate, also known as the key policy interest rate, is the interest rate that the Bank expects to be used in financial markets for one-day (or "overnight") loans between financial institutions. This key rate serves as the benchmark that banks and other financial institutions use to set interest rates for consumer loans, mortgages and other forms of lending.

Influencing short-term interest rates 

To achieve the inflation target, the Bank adjusts (raises or lowers) its key policy rate. If inflation is above target, the Bank may raise the policy rate. Doing so encourages financial institutions to increase interest rates on their loans and mortgages, discouraging borrowing and spending and thereby easing the upward pressure on prices. If inflation is below target, the Bank may lower the policy rate to encourage financial institutions to, in turn, lower interest rates on their loans and mortgages and stimulate economic activity. In other words, the Bank is equally concerned about inflation rising above or falling below the target. Such an approach guards against both high inflation and persistent deflation.

Monetary policy actions take time

Monetary policy actions take time - usually between six and eight quarters - to work their way through the economy and have their full effect on inflation. For this reason, monetary policy is always forward looking and the policy rate setting is based on the Bank’s judgment of where inflation is likely to be in the future, not what it is today.

Learn about the objective of Canada’s monetary policy and the main instruments used to implement it: the inflation-control target and the flexible exchange rate. See also how monetary policy works, how decisions are made and related backgrounders.

(Source: https://www.bankofcanada.ca)