The Bank of Canada (BoC) was formed in 1935 to provide central banking facilities following the Great Depression, which triggered heavy criticism of the Canadian banking industry. Given the dual national language of English and French, there is a French version of the website.
Bank of Canada (BoC) Responsibilities
The Bank of Canada has four main responsibilities:
- Monetary policy
- Financial system
- Funds management
Is the Bank of Canada independent?
The Band of Canada has full operational independence surrounding its decision-making. It is, however, responsible to the government and the inflation target is set jointly between the bank and government. The Governor and Senior Deputy Governor testify before parliament twice per year.
The government could exert strong pressure for a change in inflation target, although this would be politically controversial.
BoC Monetary Policy Objective
The objective of monetary policy is to preserve the value of money by keeping inflation low and stable. The monetary policy framework consists of two key components of the inflation-control target and flexible exchange rate.
The inflation-control target is set at 2.0%, the mid-point of the 1-3% target range. The target was first introduced in 1991 and is set jointly by the Federal Government and Bank of Canada with a review every five years.
Monetary Policy Operation
The Bank of Canada adjusts monetary policy in order to achieve its target of 2% and is achieved by changing the level of interest rates.
Interest rate policy works by changing the target for the overnight rate and managing this rate through open-market operations, which then sets a base for rates in the economy.
The Governing Council
Any changes in monetary policy are agreed through the Governing Council, which meets eight times per year.
There are five stages to the decision-making process:
- Presentation of staff projections
- Major Briefing
- Final Policy Recommendations
- Deliberation and Decision
- Publication and Communication
The Governing Council comprises six members: The Governor, Senior Deputy Governor and four Deputy Governors. The Monetary Policy Review Committee (MPRC), which consists of the Governing Council and special advisers, discuss the situation ahead of meetings.
Following the meeting, the bank will announce the interest rate decision alongside a policy statement, which summarises the decision and whether there is a short-term bias towards tightening or relaxing monetary policy.
Every other meeting, the Bank of Canada produces a more detailed monetary policy report on economic trends and factors influencing the policy decision.
Monetary Report Press Conference
Following the monetary policy report, the Governor and Senior Deputy Governor will hold a press conference and answer media questions surrounding the decision-making process and economic developments. Although predominantly in English, there are policy remarks and commentary in French as well.
Bank of Canada Publications
The Bank of Canada produces the Business Outlook Survey, which summarizes interviews with business representatives.
The Senior Loan Officer Survey is based on interviews with major banks and financial institutions to determine underlying lending conditions.
Both these publications are produced quarterly around one week ahead of the monetary policy reports.
The Bank of Canada produces the Financial System Review (FSR) twice per year, which takes a detailed look at issues surrounding financial stability in the economy including household vulnerabilities. It also looks at the overall international risks to financial stability.
Bank of Canada Speeches
The Bank Governor and other senior bank officials often make speeches during their time in office. These are important in setting out their thoughts on the economy and potential trends in interest rates, especially if prepared comments are followed by a Q&A session. These remarks are often significant in moving markets with the speeches from the Governor notably important, especially when they are looking to signal a change in policy direction or make a specific point over policy.
The BoC produces a number of data releases relating to credit and money, although the vast majority of the market-moving data, including inflation, trade and employment releases, is supplied by the Statistics bureau (Statistics Canada).
The Bank of Canada has the power to intervene in the currency markets and either buy or sell the Canadian dollar if it feels there is serious malfunction in market operations or that the exchange rate is substantially out of line with economic fundamentals. Actual intervention is rarely used, although the Governor can also intervene verbally in an attempt to influence market valuations.