The Bank of Canada and Interest Rates

Established in 1934, the Bank of Canada is our nation’s central bank. Led by a Governor who is elected by its Board of Directors, the Bank focuses on four key areas:

• Currency: Have you ever wondered just where the money in your purse or wallet comes from – as in who designs, produces, distributes it, and who pulls worn bills from circulation? Yes, you guessed it: The Bank of Canada! In addition, the Bank is responsible for implementing anti-counterfeiting technology, educating the public on how to spot fake bills, and working with law enforcement agencies to help deter counterfeiting.

• Funds Management: The Bank of Canada provides funds management services to both the Government of Canada, as well as other clients, including banks and credit unions. For the Government, the Bank provides advice on public debt and foreign exchange reserves, along with treasury management services. For banks and credit unions, the Bank provides essential payment, clearing and settlement systems.

• Financial System: The news has been full of stories about foreign banking systems teetering on the edge of default – or just plain falling into insolvency. Canada has escaped this fate thanks to a number of factors, including the Bank of Canada’s ability to promote a stable financial system. Tools that the Bank uses to maintain this stability include acting as a “lender of last resort,” evaluating risks to financial steadiness, and providing solid direction and development of financial system policies.

• Monetary Policy: We’ve saved this final Bank of Canada function for last, because while the above-mentioned areas are very important and play a profound role in both [province here] and Canada’s overall financial picture, the Bank’s monetary policy has the biggest impact on the topic that is concerning more and more people each day: interest rates. That’s what we’ll focus on now, below.

The Bank of Canada and Interest Rates

The first thing to note is that many factors influence interest rates, including – as we’ve seen time and time again – events well beyond our borders. However, with that being said, it’s certainly true that the Bank of Canada does indeed influence interest rates through its inflation targets.

Technically speaking, inflation is an increase in prices, which reduces the purchasing value of money. Or in less technical terms: inflation makes the $20 you have today worth less in the future, because you can’t buy as much with that $20. It also means that your employer, who may be paying you $20/hour now, will need to pay you more than that in the future. And that’s precisely what the Bank of Canada wants through its inflation targets: to gradually and safely raise the standard of living for Canadians. Once the Bank sets its target-control inflation range, it analyzes the economy to see if prices are pushing up beyond that range, or falling beneath it.

Cooling Down the Economy

When the Bank wants to reduce inflation, it moves to “cool down the economy” by boosting the interest rate at which it lends out funds (a.k.a. “the overnight rate”). This rate hike compels banks and credit unions to raise their rates, which means higher interest for mortgages, credit cards, car loans, and more for   clients and members.

The logic behind all of this is that Canadians will spend less if it costs them more to borrow – which will reduce spending, consumption and ultimately, inflation. 

Heating Up the Economy

Of course, the opposite scenario unfolds when the Bank of Canada wants to increase inflation by “heating up the economy.” That’s when it reduces its lending rate, which allows banks and credit unions to lower their rates on mortgages, car loans, credit card interest rates, and more for clients and members.

The logic behind all of this is that Canadians will spend more if it’s cheaper to borrow money -- which will increase demand, consumption and, you guessed it, inflation. 

Should You Borrow or Should You Save?

While it’s valuable to learn about the Bank of Canada and its monetary policy – especially as those policies relate to inflation and interest rates -- one thing that this overview doesn’t do is tell you whether this is the right time to borrow or save. That’s because he answer to that key question depends less on the Bank of Canada, and more on your unique goals and needs.  

At Weyburn Credit Union, we know that members like you want clear and practical answers to your important financial planning questions. And that’s why we invite you to speak to us and discover how we can help you “make sense” of interest rates and inflation, so that you can borrow and save wisely, whatever your stage of life. 

Contact us today by calling 306-842-6641 or by visiting your branch.

To learn more about the Bank of Canada, visit http://www.bankofcanada.ca/