The Bank of Canada’s significance, per the latest reports, revolves around the increased rate of interest. It has enhanced the interest rates to the utmost level since 2001. The lending rate at present is nearly 4.7 percent. This is 25 points more than the January rate of interest in 2022.
The reduction in interest rates began on July 22 last year when it dropped from 1.5 percent to 2.5 percent. Furthermore, it indicates that the rate of interest has increased by 3.25 percent.
The present increase in the interest rate is quite surprising because Tiff Macklem had stated initially that the BoC would refrain from increasing the interest rates.
The Bank of Canada anticipated that the recent price hikes would result in a decline in consumer spending to the point where the economy may begin to decelerate and stabilize. The property sector is among the goods that have seen unexpected rises in spending, according to the BoC.
Additionally, it notes that the labor market is still tight and that increased immigration and participation rates have increased the supply of employees, who are in high demand. This indicates that there is still a significant demand in the Canadian economy.
The BoC has held onto higher interest rates in recent months to limit consumer spending. This effort brought down inflation, which is currently at 4.4%.
The Bank of Canada’s significance
In 1934, the Bank of Canada emerged as the nation’s central bank; in 1938, it was raised to the status of a crown corporation. Despite being owned by the federal government, it runs independently.
According to the Bank of Canada Act, the bank’s function is to “regulate credit and currency in the best interests of the nation’s economic life.” Also, it is in charge of setting interest rates and coming up with strategies that will benefit the Canadian economy.
The BoC consists of four primary responsibility areas:
- Financial System: Promoting secure, reliable, and adequate financial systems both domestically and abroad. To further these goals, it also engages in economic market activities.
- Monetary Policy: To maintain low and steady inflation, the BoC uses our monetary policy framework to control the amount of money available for use in the Canadian economy.
- Funds Management: Managing the Canadian government’s public debt programs and foreign exchange reserves, it is the “fiscal agent” for the country.
- Currency: The Bank of Canada (BoC) creates, prints, and distributes Canada’s banknotes.
What does the BoC do?
Although it is owned by the federal government, the BoC website stresses a few distinctions between the two:
- The Bank’s Board of Directors, not the federal government, appoints the Governor and Senior Deputy Governor (with Cabinet approval).
- Despite not having a vote, the Deputy Minister of Finance is a member of the Board of Directors.
- Departments of the federal government submit their expenditures to the Treasury Board, whereas the BoC offers them to its Board of Directors.
- Employees of the BoC are subject to regulation by the Bank, not by federal public service organizations.
- Instead of the Auditor General of Canada, external auditors chosen by Cabinet on the advice of the Minister of Finance are responsible for auditing BoC’s finances.
According to the BoC, its independence from the political system allows it to adopt the medium- and long-term perspectives necessary to implement successful monetary policy.
However, in accordance with the Bank of Canada Act, the Minister of Finance has the authority to provide proper direction about monetary policy to the Governor after speaking with the Governor and receiving the Governor’s Council’s consent. The BoC shall comply with the directive, which shall contain explicit terms and be effective for a particular duration.
What is the impact of high-interest rates on newcomers?
Higher interest rates make borrowing money from Canadian banks to finance significant purchases like a mortgage or a car more expensive.
Making mortgages more expensive may make it challenging for immigrants to buy a home in Canada. Due to this, a lot of newcomers rent their first homes instead of buying them, which might be more expensive. For instance, the average monthly rent for Toronto’s one-bedroom flat is currently $2,425 a month, according to Zumper.ca.
Canada’s tight labor market is creating a need for talented immigrants. By 2025, Canada will welcome 500,000 new permanent residents annually, following the Immigration Levels Plan.
This figure is high partly due to the lack of competent people in several employment industries.
IRCC will likely start holding new category-based selection draws for Express Entry candidates with work experience in particular high-demand occupations later this summer to assist Canada in reaching its immigration targets while also filling these gaps.
However, an increase in population may increase spending and the demand for goods, services, and housing. Consequently, making it harder to lower interest rates. BoC’s action in the future isn’t known yet.
Overall, this is what the Bank of Canada’s significance looks like.
