CPABC Industry Update Fall 2014 | Page 6

The Bank of Canada: An Overview (cont’d) Even so, Canada certainly felt the effects of the global economic recession and the financial distress that has continued to afflict the United States and much of Europe. Canadian exports plummeted by one-quarter over 2008 and 2009 and have recovered only slowly since then. Business investment, outside of the energy sector, has been noticeably weak for several years. During this period, interest rates have fallen to historically low levels as the Bank of Canada has sought to bolster an economy that has struggled to achieve sustainable growth. The Goals and Mechanics of Canadian Monetary Policy As in other countries, the primary mandate of the Bank of Canada is to achieve low inflation so as to preserve the value of money and promote the economic and financial well-being of citizens. The Bank carries out this task by regulating the supply of money and credit, mainly by adjusting its short-term policy interest rate based on a well-defined framework for managing inflation that is jointly determined by the Bank and the federal Department of Finance. This inflation control framework was initially developed in the early 1990s and has been renewed at five-year intervals ever since – the latest renewal occurred in 2011. The framework establishes a specific target for inflation based on the annual change in the total Consumer Price Index (CPI), as well as a control range. Currently, the inflation target is set at 2%, while the control range is 1% to 3%. Over the past two decades, Canada has had an enviable record of maintaining low and relatively stable inflation rates consistent with the control framework agreed to by the Bank and the federal government. It should be noted that apart from the total CPI, the Bank of Canada closely monitors several other economic indicators that are relevant to understanding the evolution of price and cost pressures in the economy. These include the “core CPI,” which strips out certain volatile components from the all-items CPI (such as food and energy), along with industrial commodity prices, the value of the Canadian dollar against the US dollar and other currencies, capacity utilization rates, and trends in wages and labour compensation costs. page 6 | I N D U S T R Y U P D AT E How Does the Bank of Canada Influence Economic and Financial Activity? The Bank’s key tool is the short-term policy interest rate, often called the “bank rate.” Over time, changes in the Bank’s policy rate affect the whole suite of marketdetermined interest rates, including the prime lending rate, mortgage rates, bank savings deposit rates, and bond prices and yields.1 Lower interest rates generally encourage people to save less and to borrow and spend more, while also stimulating business investment and boosting residential home-building. In addition, lower rates often lead to increases in the prices of various kinds of assets, such as bonds, stocks, and real estate. Higher interest rates tend to have the opposite effects on consumer saving and spending decisions, business capital outlays, housing investment, and asset prices. The Bank of Canada’s views on the economy and outlook for inflation are shared with the public in its quarterly Monetary Policy Report (MPR), as well as in periodic speeches and parliamentary appearances by senior Bank officials. Each MPR publication includes an updated economic forecast prepared by the Bank’s Governing Council.2 While the forecast addresses the prospects for growth and aggregate demand in Canada and globally, it does not contain official projections for interest rates or the exchange rate. Other Responsibilities of the Bank of Canada Monetary policy is not the only responsibility of the Bank of Canada, although it is the one that the public is most aware of. The Bank is also charged with three other important tasks: afeguarding the efficiency of the Canadian • Sfinancial system. stability andworks closely with other The Bank 3 government agencies to promote a sound financial system. The Bank’s role in this domain involves ensuring that there is adequate liquidity in the banking and wider financial system, overseeing the clearing and settlement mechanics and platforms that enable financial and commercial transactions to take place in Canada, and analyzing the risks and vulnerabilities in the financial system.