The Bank of Canada seems to be shrouded in mystery; who are they and how can they control interest rates for an entire country? This unique corporation has an interesting job to do, and as Canadians, it’s rather comforting knowing they ultimately have our backs.
What is the Bank of Canada and how does it work?
The Bank of Canada (BoC) is a crown corporation, which means it is owned by the federal government, and is the nation’s central bank. It has an official Bank of Canada Act, which outlines that its principal role is “to promote the economic and financial welfare of Canada.” However, it is not fully controlled by the government. They have a governor, governing council, board of directors, and hundreds of expert staff who all contribute to managing Canada’s finances. The BoC’s job is to take steps to support the economy. For example, they regulate the amount of money in circulation; they literally have a license to print money! They are constantly analyzing to help ensure steady, slow growth – so Canadians aren’t negatively impacted by sudden fluctuations. They also have a goal of keeping inflation rates around 2%, which is ideal for economic growth.
They have a vested interested in interest rates
The Bank of Canada sets its key policy rate (or overnight rate) eight times each year. You’ll often hear about it on the news – as there is much speculation before each announcement on how much or even if rates will go up or down, and what it means for Canadians. If the Bank of Canada needs to increase inflation, it will drop its overnight rates. This allows banks and lenders to lower their mortgage rates, car/personal loan rates, and credit card rates, which encourages companies and individuals to borrow money. The theory behind it is that Canadians will spend more when it costs less to borrow money. This usually increases demand for products and services, and boosts the economy as well as inflation. On the flip side, if the BoC needs to decrease inflation, it raises its overnight rates. This way, people will be more cautious about borrowing, and it also helps cool hot markets – including the housing market. One growing concern is that Canadians have an increasing amount of personal debt load, and organizations like the Bank of Canada want to avoid the potentially catastrophic impact it will have on the country if interest rates rise drastically. When people are saddled with debt, the economy can come crashing to a halt.
Each time the overnight rate changes, banks and lenders follow suit and change their lending rates accordingly. Although many people believe that the Bank of Canada’s rate is the sole determining factor for whatever rate the banks use, this is not always the case. Banks and lenders also look at additional factors such as the various financial markets, political situations worldwide, trade policies, as well as the strength of the borrower’s application and credit history. The Bank of Canada does not set the rates for lenders, it just guides them; that is one reason why you’ll see a difference in rates between the various banks and lenders.
The bottom line
For the first time in seven years, interest rates rose slightly this past summer. Many experts speculate that this could be a slow trend towards higher rates. However, we all know how volatile the markets are, so an accurate prediction is impossible. If you’re in the market to buy a home then you shouldn’t panic, because even if the Bank of Canada raises rates today, fixed and variable-rate mortgages are at historically low levels. If you are a home buyer, or want to talk more about interest rates and how you are impacted, don’t hesitate to give me a call at 705-315-0516. As an experienced mortgage broker, it’s my job to help you get the best mortgage rate, and build a strong financial future.