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.
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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.