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The Bank of Canada is the nation’s central bank established to regulate credit and currency of the country, to control and protect the external value of the national monetary unit and to promote the economic and financial welfare of Canada. Headquartered in the country’s capital, Ottawa, the Bank of Canada was chartered in 1934 under the Bank of Canada Act. The central bank’s purpose is to create and manage Canada’s monetary policy, ensure, and promote a sound financial banking system, and issue Canadian banknotes. The Bank of Canada also provides banking services and money management for the government, and loans money to Canadian financial institutions.
The bank was originally chartered as a privately owned corporation to ensure the bank would be removed from any undue political influence.
On March 11, 1935, the Bank of Canada began operations, following the granting of royal assent to the Bank of Canada Act.
In 1938, under Prime Minister William Lyon Mackenzie King, the bank was legally designated a federal Crown corporation.
The government at the time appointed a board of directors to manage the bank, under the leadership of a governor. Each director swore an oath of "fidelity and secrecy" before taking office.
In 1944, the Bank of Canada then became the sole issuer of legal tender banknotes in Canada.
Over time, the Bank of Canada has evolved to assist with inflationary and interest rate policies.
The Bank of Canada is a Crown corporation, established to create and monitor monetary policy, as well as issue bank notes. It is run by a Board of Governors and acts as an economic lever of the Canadian economy to ensure sound financial banking systems and policies are in place.
Other banks in Canada are for-profit institutions which deal with consumer or large business customers for lending, borrowing, and financing issues. Canadian banks provide services to customers that also provide investment and savings opportunities, and some have other divisions that sell insurance and mortgage products. These banks do not set monetary policy and rely on the Bank of Canada for certain lending rates.
Private banks also work as traders and underwriters of government and corporate debt.
The Bank of Canada has many roles in Canadian economic life such as issuing monetary policy and bank notes. It has evolved, however, as a major player in inflation fighting. The Bank of Canada aims to keep inflation at the 2% midpoint of an inflation-control target range of 1% to 3%. The inflation target is expressed as the year-over-year increase in thetotal consumer price index (CPI).
Between March 2022 and July 2023, the Bank of Canada raised its policy interest rate at least 10 times with the desire to curb economic activity, reduce demand and thus curb inflationary tendencies within the economy.
In 2024, Canada's inflation is hovering around the 2% target. As of October, inflation is at 2%, an increase from the previous month, but overall, it was an indication the economy was stabilizing. However, several significant challenges have emerged since then, including rising unemployment, a weakening Canadian dollar, and tariff threats from the U.S. To guard against the economy becoming too weak, the Bank introduced a stimulus measure in December, reducing rates by another 50 bps.
The most recent cut was part of a cautious approach throughout the year, with rate cuts implemented in June, July, September, and October. The central bank continues to monitor key economic indicators closely as it works to mitigate the impact of these challenges and prevent further economic weakening.
The Bank carries out monetary policy by influencing short-term interest rates. It does this by adjusting the target for the overnight rate on eight fixed dates each year. The overnight rate is the interest rate at which a bank lends or borrows funds from another institution in the overnight market. In Canada, the overnight rate is the interest rate the central bank sets to target monetary policy.
If the economy is struggling to grow, it could pull inflation significantly below 2%. In response, the Bank might lower the policy rate so that other interest rates across the economy go down. This means:
But if the economy is growing too fast, it could lead to rising inflation. So, the Bank raises the policy rate, which means:
The overnight rate indirectly affects mortgage rates. As the overnight rate increases, it is more expensive for banks to settle their accounts, so to compensate they will raise longer-term rates. It can also affect savings rates in the same manner.
In 2020, as the COVID-19 pandemic was raging, Canada saw its inflation rate hit a low of 0.72%. The next year, due to high labour demand, supply chain slowdowns, and ultimate price increases, inflation began to rise steadily.
The worldwide phenomenon of high inflation affected many central bank policy changes. In 2022, the Bank of Canada began a policy of raising its overnight rates to curb inflation.
From March 2022 to July 2023, the Bank of Canada raised rates 10 times to a 22-year high of 5% before finally cutting rates in 2024 starting June.
By September 2024, the bank had cut the policy rate by 150 basis points. The Bank’s overnight rate as of Oct. 23, 2024, stands at 3.75%.
The chart below shows that historical overnight rate trends remained quite low – getting to as low as 0.25% in April of 2020. The inflation rate peaked in June of 2022, at a rate of 8.1%.
Since then, inflation rates have been declining steadily as oil and gas have come down, and many supply chain issues have eased. In Canada, food prices have remained a sticking point for many consumers.
While the overnight rate has come down to 3.25% from a high of 5% (in June 2023), the trend of lower inflation foretells the possibility of a further decrease in rates soon, should the lower inflation trend remain.
And while borrowing costs remain high compared to just three years ago, the housing market is showing signs of heating up again thanks to the rate cuts.
Effective Date |
Bank of Canada Overnight Rate |
Change (BPS) |
---|---|---|
December 12, 2024 | 3.25% | -0.50% |
October 24, 2024 | 3.75% | -0.50% |
September 5, 2024 | 4.25% | -0.25% |
July 25, 2024 | 4.50% | -0.25% |
June 6, 2024 | 4.75% | -0.25% |
July 13, 2023 | 5.00% | 0.25% |
June 8, 2023 | 4.75% | 0.25% |
January 26, 2023 | 4.50% | 0.25% |
December 8, 2022 | 4.25% | 0.50% |
October 27, 2022 | 3.75% | 0.50% |
September 8, 2022 | 3.25% | 0.75% |
July 14, 2022 | 2.50% | 1.00% |
June 2, 2022 | 1.50% | 0.50% |
April 14, 2022 | 1.00% | 0.50% |
March 3, 2022 | 0.50% | 0.25% |
March 27, 2020 | 0.25% | -0.50% |
March 16, 2020 | 0.75% | -0.50% |
March 4, 2020 | 1.25% | -0.50% |